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Wage-Rate Subsidies for Dislocated Workers

In: Long-term Unemployment and Reemployment Policies

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Abstract

An array of innovative policies has been suggested to address more effectively the needs of dislocated workers. In this paper, we model and simulate the impacts of a wage-rate subsidy (or salary supplement) program in which a dislocated worker who becomes reemployed would receive a payment equal to one-half the difference between the wage previously earned and the wage currently earned. The simulations are based on a search model that is institutionally rich and that provides estimates of the impacts of a wage subsidy by incorporating empirical results from the reemployment bonus experiments that were conducted in the mid- to late-1980s. The model includes several groups of workers other than dislocated workers and therefore provides estimates of the degree to which these other workers might be crowded out of jobs by the wage subsidy program. The results suggest that a wage-rate subsidy paid for two years after reemployment would shorten the unemployment spells of dislocated workers by nearly 2 weeks, and would increase employment of dislocated workers by about 900 to 1000 per 100,000 in the labor force. But the simulations also raise the possibility that the gains for dislocated workers could come at the expense of other groups of workers; that is, other groups of workers could experience small increases in unemployment duration, and decreases in employment levels that almost fully offset the gains for dislocated workers. Three factors may mitigate these crowding-out results crowding out is widely dispersed over various groups of non-dislocated workers, the structural changes that result in dislocation of some workers (and drive the need for a policy like a wage subsidy) benefit non-dislocated workers, and the crowding-out results are quite sensitive to one of our assumptions. We also compare the wage-rate subsidy program with a reemployment bonus, and show that the two can be structured so as to give identical results.

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Bibliographic Info

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This chapter was published in: Laurie J. Bassi & Stephen A. Woodbury (ed.) Long-term Unemployment and Reemployment Policies, JAI Press, pages 141-184, 2000.

This item is provided by W.E. Upjohn Institute for Employment Research in its series Book chapters authored by Upjohn Institute researchers with number cdsawjai.

Handle: RePEc:upj:uchaps:cdsawjai

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Keywords: wage subsidies; dislocated workers; displaced workers; long-term unemployment;

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References

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  1. Rebecca Blank & David Card & Whitney Newey, 1988. "Recent Trends in Insured and Uninsured Unemployment: Is There an Explanation?," Working Papers 623, Princeton University, Department of Economics, Industrial Relations Section..
  2. Jacobson, Louis S & LaLonde, Robert J & Sullivan, Daniel G, 1993. "Earnings Losses of Displaced Workers," American Economic Review, American Economic Association, vol. 83(4), pages 685-709, September.
  3. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  4. Davidson, Carl & Woodbury, Stephen A, 1993. "The Displacement Effect of Reemployment Bonus Programs," Journal of Labor Economics, University of Chicago Press, vol. 11(4), pages 575-605, October.
  5. Louis S. Jacobson & Robert J. LaLonde & Daniel G. Sullivan, 1993. "Long-term earnings losses of high-seniority displaced workers," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 2-20.
  6. Phillip Levine, 1991. "Spillover Effects Between the Insured and Uninsured Unemployed," Working Papers 663, Princeton University, Department of Economics, Industrial Relations Section..
  7. Hurd, Michael D. & Pencavel, John H., 1981. "A utility-based analysis of the wage subsidy program," Journal of Public Economics, Elsevier, vol. 15(2), pages 185-201, April.
  8. Katz, Lawrence F. & Meyer, Bruce D., 1990. "The impact of the potential duration of unemployment benefits on the duration of unemployment," Journal of Public Economics, Elsevier, vol. 41(1), pages 45-72, February.
  9. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
  10. Stephen A. Woodbury, 2009. "Unemployment," Book chapters authored by Upjohn Institute researchers, in: Kenneth G. Dau-Schmidt & Seth D. Harris & Orley Lobel (ed.), Labor and Employment Law and Economics, volume 2, pages 480-516 W.E. Upjohn Institute for Employment Research.
  11. Daniel S. Hamermesh, 1987. "What Do We Know About Worker Displacement in the U.S.?," NBER Working Papers 2402, National Bureau of Economic Research, Inc.
  12. Patricia M. Anderson & Bruce D. Meyer, 1994. "Unemployment Insurance Benefits and Takeup Rates," NBER Working Papers 4787, National Bureau of Economic Research, Inc.
  13. Kim B. Clark & Lawrence H. Summers, 1984. "Unemployment Insurance and Labor Force Transitions," NBER Working Papers 0920, National Bureau of Economic Research, Inc.
  14. Paul T. Decker & Christopher J. O'Leary., 1991. "An Analysis of Pooled Evidence From the Pennsylvania and Washington Reemployment Bonus Demonstrations," Mathematica Policy Research Reports 1134, Mathematica Policy Research.
  15. Abraham, Katharine G, 1983. "Structural-Frictional vs. Deficient Demand Unemployment: Some New Evidence," American Economic Review, American Economic Association, vol. 73(4), pages 708-24, September.
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Cited by:
  1. Dale T. Mortensen & Christopher A. Pissarides, 2002. "Taxes, Subsidies and Equilibrium Labor Market Outcomes," CEP Discussion Papers dp0519, Centre for Economic Performance, LSE.
  2. Christian, GOEBEL, 2006. "The effect of temporary employment subsidies on employment duration," Discussion Papers (ECON - Département des Sciences Economiques) 2006035, Université catholique de Louvain, Département des Sciences Economiques.
  3. Lawrence F. Katz, 1996. "Wage Subsidies for the Disadvantaged," NBER Working Papers 5679, National Bureau of Economic Research, Inc.
  4. Carl Davidson & Stephen A. Woodbury, 1996. "Unemployment Insurance and Unemployment: Implications of the Reemployment Bonus Experiments," Upjohn Working Papers and Journal Articles 96-44, W.E. Upjohn Institute for Employment Research.

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