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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. GiancarloCorsetti & JohnFlemming & SeppoHonkapohja & WilliLeibfritz & GillesSaint-Paul & Hans-WernerSinn & XavierVives, 2002. "EEAG European Economic Advisory Group at CESifo: Report on the European Economy 2002," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 1-99, April.
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    1. International Monetary Fund, 2007. "Republic of Lithuania; Selected Issues," IMF Staff Country Reports 07/137, International Monetary Fund.

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