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Do wage subsidies for disabled workers result in deadweight loss? – evidence from the Danish Flexjob scheme

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  • Nabanita Datta Gupta

    ()
    (Department of Economics and Business, Aarhus University)

  • Mona Larsen

    (SFI - The Danish National Centre for Social Research)

  • Lars Brink Thomsen

    (Danmarks Nationalbank)

Abstract

We evaluate the effects of wage subsidy programs for the disabled, in particular, their potential for welfare-loss reduction vs. deadweight loss creation. We do this in the context of the Danish Flexjob scheme, a large, nation-wide scheme that was implemented in 1998 and targeted towards improving the employment prospects of the long-term disabled with partial working capacity. We analyse the hiring response to a shock in the wage reimbursement amount to certain firms using the program. Firms received a salary reimbursement for both current and new employees granted a Flexjob subsidy. In 2002, the reimbursement to government firms was lowered while the reimbursement to municipal and regional employers remained the same. We combine the reform with unique data on whether or not a new Flexjob hiree was previously employed in a regular (unsubsidized) job at the same firm. Thus, we can investigate whether the changes in the reimbursement amount to governmental units affected the share of Flexjobs within such firms that were allocated to retained employees versus to new hires. The findings show substantial substitution between “insiders” and “outsiders” after the reform. After the reform, governmental firms create fewer Flexjobs. At the same time, the composition of Flexjob hires within such firms changes substantially: the share of new Flexjobs allocated to retained employees is twice as large as it would have been in absence of the reform. The finding on deadweight loss seems to run counter to the theoretical prediction. A possible alternative mechanism for the finding could be that when subsidies are reduced and worker productivity is not known with certainty, employers have an economic incentive to fill Flexjob positions from inside the firm.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2013-24.

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Length: 35
Date of creation: 04 Nov 2013
Date of revision:
Handle: RePEc:aah:aarhec:2013-24

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: disability; wage subsidies; deadweight loss; difference-in-differences;

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  1. Lawrence F. Katz, 1996. "Wage Subsidies for the Disadvantaged," NBER Working Papers 5679, National Bureau of Economic Research, Inc.
  2. Betcherman, Gordon & Daysal, N. Meltem & Pagés, Carmen, 2010. "Do employment subsidies work? Evidence from regionally targeted subsidies in Turkey," Labour Economics, Elsevier, vol. 17(4), pages 710-722, August.
  3. Humer, Brigitte & Wuellrich, Jean-Philippe & Zweimüller, Josef, 2007. "Integrating Severely Disabled Individuals into the Labour Market: The Austrian Case," IZA Discussion Papers 2649, Institute for the Study of Labor (IZA).
  4. David H. Autor & Mark G. Duggan, 2007. "Distinguishing Income from Substitution Effects in Disability Insurance," American Economic Review, American Economic Association, vol. 97(2), pages 119-124, May.
  5. Takis Venetoklis & Aki Kangasharju, 2003. "Do Wage-subsidies Increase Employment in Firms?," Discussion Papers 304, Government Institute for Economic Research Finland (VATT).
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  7. Barron, John M & Black, Dan A & Loewenstein, Mark A, 1987. "Employer Size: The Implications for Search, Training, Capital Investment, Starting Wages, and Wage Growth," Journal of Labor Economics, University of Chicago Press, vol. 5(1), pages 76-89, January.
  8. Aki Kangasharju, 2005. "Do Wages Subsidies Increase Employment in Subsidised Firms?," Discussion Papers 378, Government Institute for Economic Research Finland (VATT).
  9. Brian Bell & Richard Blundell & John Van Reenen, 1999. "Getting the unemployed back to work: the role of targeted wage subsidies," IFS Working Papers W99/12, Institute for Fiscal Studies.
  10. Riccardo Welters & Joan Muysken, 2006. "Employer search and employment subsidies," Applied Economics, Taylor & Francis Journals, vol. 38(12), pages 1435-1448.
  11. Richard Blundell & Monica Costa Dias & Costas Meghir & John Van Reenen, 2004. "Evaluating the Employment Impact of a Mandatory Job Search Program," Journal of the European Economic Association, MIT Press, vol. 2(4), pages 569-606, 06.
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