Subsidizing new jobs in the Euro-zone periphery

The macroeconomic effects of a selective wage subsidy targeted to new labour hires are evaluated and compared with those of standard fiscal instruments. The analyses are based on a search and matching monetary model in which a distinction between the wage negotiated by newly-hired workers and incumbents is introduced. The model is estimated using data for high unemployment countries of the Euro-zone periphery. We show that, although the labour market policy can be an effective measure to jump-start employment, it is not superior to standard fiscal expansions in stimulating a timely response of economic activity. A liquidity trap environment reinforces these results, showing that policy actions triggering a deflation can be pro-cyclical with zero interest rates.