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Subsidizing Extra Jobs: Promoting Employment by Taming the Unions

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  • Andreas Knabe
  • Ronnie Schöb

Abstract

We study the subsidization of extra jobs in a general equilibrium framework. While the previous literature focuses on symmetric marginal employment subsidies where firms are rewarded when they increase employment but punished when they reduce their workforce, we consider an asymmetric scheme that only rewards employment expansion. This changes the incidence substantially. In the asymmetric case without punishment, it becomes less costly for firms to lay off a substantial fraction of their workforce when trade unions raise wages. This tames the unions, which causes wage moderation and raises aggregate employment and welfare. For moderate subsidy rates, all unions prefer to restrain their wage claims. At sufficiently high subsidy rates, labor market conditions improve so much that some unions enforce higher wages and let their firms shrink. This displacement of firms might have a negative impact on employment and welfare.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2130.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2130

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Keywords: marginal employment subsidies; unemployment; general equilibrium;

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References

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  1. Richard Layard & Stephen Nickell, 1998. "Labour Market Institutions and Economic Performance," CEP Discussion Papers dp0407, Centre for Economic Performance, LSE.
  2. Olivier Blanchard & Francesco Giavazzi, . "Macroeconomic effects of regulation and deregulation in goods and labor markets," Working Papers 187, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Andreas Knabe & Ronnie Schöb & Joachim Weimann, 2006. "Marginal Employment Subsidization: A New Concept and a Reappraisal," CESifo Working Paper Series 1707, CESifo Group Munich.
  4. Oswald, Andrew, 1982. "Three Theorems on Inflation Taxes and Marginal Employment Subsidies," The Warwick Economics Research Paper Series (TWERPS) 220, University of Warwick, Department of Economics.
  5. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, December.
  6. Layard, P R G & Nickell, S J, 1980. "The Case for Subsidising Extra Jobs," Economic Journal, Royal Economic Society, vol. 90(357), pages 51-73, March.
  7. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  8. 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.
  9. Giuseppe Carone & Herwig Immervoll & Dominique Paturot & Aino Salomäki, 2004. "Indicators of Unemployment and Low-Wage Traps: Marginal Effective Tax Rates on Employment Incomes," OECD Social, Employment and Migration Working Papers 18, OECD Publishing.
  10. Bishop, John & Haveman, Robert, 1979. "Selective Employment Subsidies: Can Okun's Law be Repealed?," American Economic Review, American Economic Association, vol. 69(2), pages 124-30, May.
  11. 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.
  12. Heijdra, Ben J., 2009. "Foundations of Modern Macroeconomics," OUP Catalogue, Oxford University Press, edition 2, number 9780199210695.
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Cited by:
  1. Andreas Knabe & Ronnie Schöb, 2008. "Minimum Wages and their Alternatives: A Critical Assessment," CESifo Working Paper Series 2494, CESifo Group Munich.

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