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Subsidizing low-skilled jobs in a dual labor market

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Author Info
Pascal Belan (LEN, Université de Nantes)
Martine Carré () (CEPII, CREST and THEMA, Université de Cergy)
Stéphane Gregoir (CREST-INSEE)

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Abstract

A large exclusion from the labor market or an important unemployment of low-skilled workers is observed in some developed economies in which a minimum wage has been introduced. In such circumstances, governments may adopt two kinds of policies. They may pay unemployment benefits or they may try to increase demand for low-skilled labor by subsidizing low-skilled jobs. In this paper, we propose a matching model which allows to analyze the effects of these policies on the labor market. In our framework, the government budget is balanced through taxes on occupied workers and classical and frictional unemployment simultaneously exist. The labor market is dual featuring low-skilled and high-skilled workers. Low-skilled jobs pay the minimum wage, while high-skilled wages result from bargaining. Moreover, high-skilled unemployed can apply for both types of jobs thereby accepting to be downgraded, while opportunities for low-skilled workers are limited to low-skilled jobs. We first give conditions for the existence and uniqueness of a steady- state equilibrium and we analyze the effects of several fiscal instruments. In this set-up, increasing low-skilled job subsidies does not necessarily reduce low-skilled unemployment or unemployment spells. We provided empirical evidence by calibrating our model on French labor market data, it is found that for five low-skilled workers leaving classical unemployment, two high-skilled workers are downgraded (although they might have been previously unemployed).

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Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2007-17.

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Date of creation: 2007
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Handle: RePEc:ema:worpap:2007-17

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Related research
Keywords: Crowding-out; Matching; On-the-job search; Taxation;

Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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  1. Juan J. Dolado & Marcel Jansen & Juan F. Jimeno, . "On-the-Job Search in a Matching Model with Heterogenous Jobs and Workers," Working Papers 2003-21, FEDEA. [Downloadable!]
    Other versions:
  2. Mathias, HUNGERBUELHER & Etienne, LEHMANN & Alexis PARMENTIER & Bruno VAN DER LINDEN, 2003. "Optimal Income Taxation in an Equilibrium Unemployment Model : Mirrlees meets Pissarides," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2003024, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
    Other versions:
  3. Pissarides, Christopher A, 1985. "Taxes, Subsidies, and Equilibrium Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 52(1), pages 121-33, January. [Downloadable!] (restricted)
  4. Lommerud, Kjell Erik & Bj¯rn Sandvik & Odd Rune Straume, 2002. "Good jobs, bad jobs and redistribution," Royal Economic Society Annual Conference 2002 131, Royal Economic Society. [Downloadable!]
    Other versions:
  5. Acemoglu, Daron, 2001. "Good Jobs versus Bad Jobs," Journal of Labor Economics, University of Chicago Press, vol. 19(1), pages 1-21, January. [Downloadable!] (restricted)
  6. Abbring, Jaap H., 1999. "Commitment and wage bargaining in job matching models with costly search," Serie Research Memoranda 0021, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics. [Downloadable!]
  7. Teulings, Coen & Koopmanschap, Marc, 1989. "An econometric model of crowding out of lower education levels," European Economic Review, Elsevier, vol. 33(8), pages 1653-1664, October. [Downloadable!] (restricted)
  8. Gabriele, CARDULLO & Bruno, VANDERLINDEN, 2006. "Employment subsidies and substitutable skills : An equilibrium matching approach," Discussion Papers (ECON - Département des Sciences Economiques) 2006010, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
    Other versions:
  9. James Albrecht & Susan Vroman, 2002. "A Matching Model with Endogenous Skill Requirements," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 283-305, February. [Downloadable!] (restricted)
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  10. Olivier, Pierrard & Henri R., Sneessens, 2002. "Low-Skilled Unemployment, Biased Technological Shocks and Job Competition," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2003014, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 03 May 2002. [Downloadable!]
    Other versions:
  11. Dreze, Jacques H. & Malinvaud, Edmond, 1994. "Growth and employment: The scope of a European initiative," European Economic Review, Elsevier, vol. 38(3-4), pages 489-504, April. [Downloadable!] (restricted)
  12. Frank Oskamp & Dennis J. Snower, 2006. "The Effect of Low-Wage Subsidies on Skills and Employment," Kiel Working Papers 1292, Kiel Institute for the World Economy. [Downloadable!]
  13. Anna Batyra & Henri R. Sneessens, 2006. "Selective Reductions in Labour Taxation: Labour Market Adjustments and Macroeconomic Performance," 2006 Meeting Papers 142, Society for Economic Dynamics. [Downloadable!]
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  14. Hartog, Joop & Ridder, G & Visser, M, 1994. "Allocation of Individuals to Job Levels under Rationing," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(4), pages 437-51, Oct.-Dec.. [Downloadable!] (restricted)
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