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Wage Subsidies for the Long Term Unemployed: A Search Theoretic Analysis

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  • J Richardson
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    Abstract

    The persistence of mass unemployment in many OECD countries in the 1980s and 1990s has led to renewed interest in active labour market policies. We examine one such policy, a wage subsidy for employers hiring the long-term unemployed, using a search-theoretic framework. We assume that long-term unemployment leads to a loss of human capital, and that a subsidy can offset the consequent training costs faced by employers hiring the long-term unemployed. We argue that unemployment would be unambiguously reduced by such a policy. Furthermore, the often-made criticism of wage subsidies that they mainly lead to substitution, merely churning the unemployed, is misplaced. There are positive externalities to substitution that lead firms to open more vacancies, many of which in turn will be filled by the short-term unemployed.

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    Bibliographic Info

    Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0347.

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    Date of creation: May 1997
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    Handle: RePEc:cep:cepdps:dp0347

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    Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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    1. Calmfors, L. & Skedinger, P., 1995. "Does Active Labour Market Policy Increase Employment? - Theoretical Considerations and Some Empirical Evidence from Sweden," Papers 590, Stockholm - International Economic Studies.
    2. Manning, Alan, 1993. "Wage Bargaining and the Phillips Curve: The Identification and Specification of Aggregate Wage Equations," Economic Journal, Royal Economic Society, vol. 103(416), pages 98-118, January.
    3. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
    4. Calmfors, Lars & Forslund, Anders, 1991. "Real-Wage Determination and Labour Market Policies: The Swedish Experience," Economic Journal, Royal Economic Society, vol. 101(408), pages 1130-48, September.
    5. Pissarides, Christopher A, 1992. "Loss of Skill during Unemployment and the Persistence of Employment Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1371-91, November.
    6. Martin Neil Baily & James Tobin, 1977. "Macroeconomic Effects of Selective Public Employment and Wage Subsidies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(2), pages 511-544.
    7. Snower, Dennis J, 1994. "Converting Unemployment Benefits into Employment Subsidies," American Economic Review, American Economic Association, vol. 84(2), pages 65-70, May.
    8. J Richardson, 1997. "Can Active Labour Market Policy Work? Some Theoretical Considerations," CEP Discussion Papers dp0331, Centre for Economic Performance, LSE.
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    Cited by:
    1. Brian Bell & Richard Blundell & John Reenen, 1999. "Getting the Unemployed Back to Work: The Role of Targeted Wage Subsidies," International Tax and Public Finance, Springer, vol. 6(3), pages 339-360, August.
    2. J Richardson, 1998. "Do wage subsidies Enhance Employability? Evidence from Australian Youth," CEP Discussion Papers dp0387, Centre for Economic Performance, LSE.
    3. Bucher, Anne, 2010. "Impacts of hiring subsidies targeted at the long-term unemployed on the low-skilled labor market: The French experience," Economic Modelling, Elsevier, vol. 27(2), pages 553-565, March.

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