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Wage Subsidies for the Disadvantaged

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Author Info
Lawrence F. Katz

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Abstract

Wage subsidies to private employers have often been proposed by economists as a potentially flexible and efficient method to improve the earnings and employment of low-wage workers. This paper lays out the basic economics of wage subsidies; examines issues arising in the design of alternative forms of wage subsidies; and reviews evidence on the effectiveness of recent U.S. wage subsidy programs and demonstration projects. Wage subsidies to employers to hire disadvantaged workers appear to modestly raise the demand for labor for those workers. Stand-alone wage subsidies (or employment tax credits) that are highly targeted on very specific groups (such as welfare recipients) appear to have low utilization rates and may (in some cases) stigmatize the targeted group. But new evidence based on an examination of changes in eligibility rules for the Targeted Jobs Tax Credit, the major U.S. wage subsidy program for the economically disadvantaged from 1979 to 1994, suggests modest positive employment effects of the TJTC on economically disadvantaged young adults. Policies combining wage subsidies with job development, training, and job search assistance efforts appear to have been somewhat successful in improving the employment and earnings of specific targeted disadvantaged groups.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5679.

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Date of creation: Jul 1996
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Publication status: published as Generating Jobs, Freeman, R. and P. Gottschalk, eds., New York: Russell Sage Foundation, 1998, pp. 21-53.
Handle: RePEc:nbr:nberwo:5679

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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. Dale T. Mortensen, 1994. "Reducing supply-side disincentives to job creation," Proceedings, Federal Reserve Bank of Kansas City, issue Jan, pages 189-237.
  2. Moffitt, Robert, 1992. "Incentive Effects of the U.S. Welfare System: A Review," Journal of Economic Literature, American Economic Association, vol. 30(1), pages 1-61, March. [Downloadable!] (restricted)
  3. David Card & Philip Robins, 1996. "Do Financial Incentives Encourage Welfare Recipients to Work? Early Findings from the Canadian Self Sufficiency Project," Working Papers 738, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  4. Lawrence F. Katz, 1994. "Active labor market policies to expand employment and opportunity," Proceedings, Federal Reserve Bank of Kansas City, issue Jan, pages 239-322.
  5. Bruce D. Meyer, 1995. "Lessons from the U.S. Unemployment Insurance Experiments," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 91-131, March. [Downloadable!] (restricted)
  6. Gary Burtless, 1985. "Are targeted wage subsidies harmful? Evidence from a wage voucher experiment," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 39(1), pages 105-114, October.
  7. Surendra Gera, 1987. "An Evaluation of the Canadian Employment Tax Credit Program," Canadian Public Policy, University of Toronto Press, vol. 13(2), pages 196-207, June. [Downloadable!] (restricted)
  8. Dubin, Jeffrey A. & Rivers, Douglas, 1993. "Experimental estimates of the impact of wage subsidies," Journal of Econometrics, Elsevier, vol. 56(1-2), pages 219-242, March. [Downloadable!] (restricted)
  9. LaLonde, Robert J, 1995. "The Promise of Public Sector-Sponsored Training Programs," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 149-68, Spring. [Downloadable!] (restricted)
  10. Couch, Kenneth A, 1992. "New Evidence on the Long-Term Effects of Employment Training Programs," Journal of Labor Economics, University of Chicago Press, vol. 10(4), pages 380-88, October. [Downloadable!] (restricted)
  11. Kevin Hollenbeck & Richard J. Willke, 1991. "The Employment and Earnings Impacts of the Targeted Jobs Tax Credit," Staff Working Papers 91-07, W.E. Upjohn Institute for Employment Research. [Downloadable!] (restricted)
  12. Carl Davidson & Stephen A. Woodbury, 1995. "Wage Subsidies for Dislocated Workers," Staff Working Papers 95-31, W.E. Upjohn Institute for Employment Research. [Downloadable!] (restricted)
  13. Woodbury, Stephen A & Spiegelman, Robert G, 1987. "Bonuses to Workers and Employers to Reduce Unemployment: Randomized Trials in Illinois," American Economic Review, American Economic Association, vol. 77(4), pages 513-30, September. [Downloadable!] (restricted)
  14. repec:fth:prinin:359 is not listed on IDEAS
  15. Manning, Alan, 1995. "How Do We Know That Real Wages Are Too High?," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1111-25, November. [Downloadable!] (restricted)
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