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Marginal Employment Subsidization: A New Concept and a Reappraisal

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Author Info

  • Andreas Knabe
  • Ronnie Schöb
  • Joachim Weimann

Abstract

In this paper, we attempt to renew the interest in marginal employment subsidies. Such subsidies are paid only for a firm's additional employment exceeding some reference level and create larger employment stimuli at lower fiscal costs than general wage subsidies for all workers. If the hiring of a new employee also entails subsidizing an incumbent worker (double marginal subsidization), the replacement of regular paid workers by outsourcing employment to newly established firms – a standard critique of marginal employment subsidies – can be avoided. This additional subsidy reduces the incentive to crowd out regular employment and results in even larger employment effects. Applying the subsidy scheme to the low-skill labor market in Germany, we show that employment can be substantially increased without imposing additional fiscal burden.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1707.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1707

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Keywords: unemployment; marginal employment subsidies;

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References

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  1. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 15(30), pages 47-104, 04.
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  5. Addison, John T. & Bellmann, Lutz & Schank, Thorsten & Teixeira, Paulino, 2005. "The Demand for Labor: An Analysis Using Matched Employer-Employee Data from the German LIAB. Will the High Unskilled Worker Own-Wage Elasticity Please Stand Up?," IZA Discussion Papers 1780, Institute for the Study of Labor (IZA).
  6. Orszag, J. Michael & Snower, Dennis J., 2003. "Designing employment subsidies," Labour Economics, Elsevier, Elsevier, vol. 10(5), pages 557-572, October.
  7. Johnson, George & Stafford, Frank, 1999. "The labor market implications of international trade," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 34, pages 2215-2288 Elsevier.
  8. Alfred Boss & Thomas Elendner, 2005. "Incentives to Work: The Case of Germany," Kiel Working Papers 1237, Kiel Institute for the World Economy.
  9. Falk, Martin & Koebel, Bertrand M, 2002. " Outsourcing, Imports and Labour Demand," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 104(4), pages 567-86, December.
  10. Orszag, Jonathan Michael & Snower, Dennis J., 2000. "The effectiveness of employment vouchers : a simple approach," Open Access Publications from Kiel Institute for the World Economy, Kiel Institute for the World Economy (IfW) 2519, Kiel Institute for the World Economy (IfW).
  11. J. Michael Orszag & Dennis J. Shower, 2000. "The Effectiveness of Employment Vouchers: A Simple Approach," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 1(4), pages 385-419, November.
  12. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, American Economic Association, vol. 82(1), pages 249-61, March.
  13. Snower, Dennis J., 1994. "Converting Unemployment Benefits into Employment Subsidies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 930, C.E.P.R. Discussion Papers.
  14. Layard, P R G & Nickell, S J, 1980. "The Case for Subsidising Extra Jobs," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 90(357), pages 51-73, March.
  15. Bishop, John & Haveman, Robert, 1979. "Selective Employment Subsidies: Can Okun's Law be Repealed?," American Economic Review, American Economic Association, American Economic Association, vol. 69(2), pages 124-30, May.
  16. Hans-Werner Sinn & Christian Holzner & Wolfgang Meister & Wolfgang Ochel & Martin Werding, 2006. "Aktivierende Sozialhilfe 2006 - das Kombilohn-Modell des ifo Instituts," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 59(02), pages 06-27, 01.
  17. Ronnie Schöb und Joachim Weimann & Joachim Weimann, 2003. "Kombilohn: Die Magdeburger Alternative," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, Verein für Socialpolitik, vol. 4(1), pages 1-17, 02.
  18. Hart, Robert A, 1989. "The Employment and Hours Effects of a Marginal Employment Subsidy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 36(4), pages 385-95, November.
  19. George F. Kopits, 1978. "Wage Subsidies and Employment: An Analysis of the French Experience (Les subventions des salaires et le niveau d'emploi: analyze de l'expérience française) (Subsidios salariales y el nivel de em," IMF Staff Papers, Palgrave Macmillan, vol. 25(3), pages 494-527, September.
  20. Assar Lindbeck & Dennis J. Snower, 2001. "Insiders versus Outsiders," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(1), pages 165-188, Winter.
  21. Whitley, J D & Wilson, R A, 1983. "The Macroeconomic Merits of a Marginal Employment Subsidy," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 93(372), pages 862-80, December.
  22. Hans-Werner Sinn & Christian Holzner & Wolfgang Meister & Wolfgang Ochel & Martin Werding, 2002. "Aktivierende Sozialhilfe - Ein Weg zu mehr Beschäftigung und Wachstum," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 55(09), pages 03-52, 05.
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Citations

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Cited by:
  1. Huttunen, Kristiina & Pirttilä, Jukka & Uusitalo, Roope, 2010. "The Employment Effects of Low-Wage Subsidies," IZA Discussion Papers 4931, Institute for the Study of Labor (IZA).
  2. Andreas Knabe & Ronnie Schöb, 2008. "Minimum Wage Incidence: The Case for Germany," CESifo Working Paper Series 2432, CESifo Group Munich.
  3. Bijie Ren, 2008. "The regional effects of marginal wage subsidies," Psychometrika, Springer, Springer, vol. 3(4), pages 598-626, December.
  4. Ronnie Schöb & Joachim Weimann, 2007. "Die Magdeburger Alternative: Lohnende Arbeit bezahlbar machen," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 60(04), pages 42-45, 02.
  5. Andreas Knabe & Ronnie Schöb, 2007. "Subsidizing Extra Jobs: Promoting Employment by Taming the Unions," FEMM Working Papers 07020, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  6. Antonis Adam & Thomas Moutos, 2006. "A Politico-Economic Analysis of Minimum Wages and Wage Subsidies," CESifo Working Paper Series 1810, CESifo Group Munich.
  7. Schöb, Ronnie, 2007. "Soziale Grundsicherung und Beschäftigung," Discussion Papers 2007/12, Free University Berlin, School of Business & Economics.

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