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Comparing the Effectiveness of Employment Subsidies

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Author Info
Alessio J. G. Brown,
Christian Merkl
Dennis J. Snower

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Abstract

This paper provides a theoretical and quantitative analysis of various types of wellknown employment subsidies. Two important questions are addressed: (i) How should employment subsidies be targeted? (ii) How large should the subsidies be? We consider measures involving targeting workers with low incomes/abilities and targeting the unemployed. To make our analysis particularly useful to policy makers, we focus on policies that are "approximately welfare efficient," i.e. policies that (a) improve employment and welfare, (b) do not raise earnings inequality and (c) are self-financing. This criterion enables us to identify policies which satisfy these favorable properties and to determine the size of the subsidies required for this purpose. We construct a simple, dynamic model of hiring and separations, derived from microfoundations, and calibrate it with German data. The calibration shows that hiring vouchers targeted at the long-term unemployed and low-income/ability workers can be approximately welfare efficient, while low-wage subsidies do not satisfy this criterion. Even in terms of inequality reduction low-wage subsidies are outperformed by targeted hiring vouchers. Furthermore, hiring vouchers targeted at the long-term unemployed are more effective than hiring vouchers targeted at low-income/ability workers. These subsidy rankings also hold if the self-financing constraint is relaxed and the government spends a given additional amount on the subsidies.

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1302.

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Length: 28 pages
Date of creation: Nov 2006
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Handle: RePEc:kie:kieliw:1302

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Related research
Keywords: low wage subsidy; hiring voucher; targeting; employment; unemployment; duration; self-financing;

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Find related papers by JEL classification:
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
J68 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Public Policy

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christian Merkl & Dennis J. Snower, 2007. "Escaping the Unemployment Trap — The Case of East Germany," Kiel Working Papers 1309, Kiel Institute for the World Economy. [Downloadable!]
  2. Alessio J. G. Brown & Dennis Snower, 2009. "Incentives and Complementarities of Flexicurity," Kiel Working Papers 1526, Kiel Institute for the World Economy. [Downloadable!]
  3. Frank Oskamp & Dennis J. Snower, 2007. "Interactions between Employment and Training Policies," Kiel Working Papers 1389, Kiel Institute for the World Economy. [Downloadable!]
  4. Jochen Michaelis & Alexander Spermann, 2009. "Geringqualifizierte Arbeit, Marktlöhne und Sozialpolitik: Konzepte für Deutschland," MAGKS Papers on Economics 200920, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung). [Downloadable!]
  5. Lechthaler, Wolfgang & Merkl, Christian & Snower, Dennis J., 2008. "Monetary Persistence and the Labor Market: A New Perspective," IZA Discussion Papers 3513, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  6. Merkl, Christian & Snower, Dennis J., 2008. "Escaping the Unemployment Trap: The Case of East Germany," IZA Discussion Papers 3681, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
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