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Marginal Employment Subsidization: A New Concept and a Reappraisal

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  • 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.

Suggested Citation

  • Andreas Knabe & Ronnie Schöb & Joachim Weimann, 2006. "Marginal Employment Subsidization: A New Concept and a Reappraisal," Kyklos, Wiley Blackwell, vol. 59(4), pages 557-577, November.
  • Handle: RePEc:bla:kyklos:v:59:y:2006:i:4:p:557-577
    DOI: 10.1111/j.1467-6435.2006.00349.x
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    1. Adam, Antonis & Moutos, Thomas, 2011. "A politico-economic analysis of minimum wages and wage subsidies," Economics Letters, Elsevier, vol. 110(3), pages 171-173, March.
    2. Jukka Pirttilä & Hakan Selin, 2011. "Tax Policy and Employment: How Does the Swedish System Fare?," CESifo Working Paper Series 3355, CESifo.
    3. Schöb, Ronnie, 2007. "Soziale Grundsicherung und Beschäftigung," Discussion Papers 2007/12, Free University Berlin, School of Business & Economics.
    4. Andreas Knabe & Ronnie Schöb, 2009. "Minimum Wage Incidence: The Case for Germany," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(4), pages 403-441, December.
    5. Huttunen, Kristiina & Pirttilä, Jukka & Uusitalo, Roope, 2013. "The employment effects of low-wage subsidies," Journal of Public Economics, Elsevier, vol. 97(C), pages 49-60.
    6. International Monetary Fund, 2007. "Republic of Lithuania: Selected Issues," IMF Staff Country Reports 2007/137, International Monetary Fund.
    7. Andreas Knabe & Ronnie Schöb, 2013. "Subsidizing extra jobs: promoting employment by taming the unions," Oxford Economic Papers, Oxford University Press, vol. 65(4), pages 807-831, October.
    8. Bijie Ren, 2008. "The regional effects of marginal wage subsidies," Psychometrika, Springer;The Psychometric Society, vol. 3(4), pages 598-626, December.
    9. Ronnie Schöb & Joachim Weimann, 2007. "Die Magdeburger Alternative: Lohnende Arbeit bezahlbar machen," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 60(04), pages 42-45, February.

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