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Subsidizing low-skilled jobs in a dual labor market

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  • Belan, Pascal
  • Carré, Martine
  • Gregoir, Stéphane

Abstract

We introduce a matching model that allows for classical and frictional unemployment. The labor market is dual featuring low-skilled and high-skilled workers and simple and complex jobs. Simple jobs pay a minimum wage, while wages in the complex jobs are determined by Nash bargaining. Opportunities for low-skilled workers are limited to simple jobs; while high-skilled unemployed can apply for both types of jobs, and thereby can accept to be downgraded. We analyze the outcomes of simple job subsidy policies assuming that government budget is balanced through taxes on occupied workers. We first give conditions for the existence and uniqueness of a steady-state equilibrium and we then analyze the effects of different fiscal instruments. We show that in this set-up, increasing simple job subsidies does not necessarily reduce low-skilled unemployment or unemployment spells. By introducing heterogeneous skills and possible downgrading of the high-skilled workers, we show that the effectiveness of such policies in reducing the classical unemployment is decreasing. In fact, any additional classical unemployed re-entering the job market is accompanied by an increasing number of high-skilled workers downgrading to low-skilled jobs. We calibrate the model on French labor market data. It is found that for five low-skilled workers leaving classical unemployment, two high-skilled workers are downgraded.

Suggested Citation

  • Belan, Pascal & Carré, Martine & Gregoir, Stéphane, 2010. "Subsidizing low-skilled jobs in a dual labor market," Labour Economics, Elsevier, vol. 17(5), pages 776-788, October.
  • Handle: RePEc:eee:labeco:v:17:y:2010:i:5:p:776-788
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    2. Clément Carbonnier, 2014. "Payroll Taxation and the structure of qualifications and wages in a segmented frictional labor market with intrafirm bargaining," THEMA Working Papers 2014-20, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    3. Michela Bia & Pierre-Jean Messe & Roberto Leombruni, 2010. "Young-in Old-out: a new evaluation," TEPP Working Paper 2010-14, TEPP.
    4. Vincent Charlet & Philippe Frocrain, 2017. "Les limites des allégements de charges sur les bas salaires," Working Papers hal-01695167, HAL.
    5. Mariusz Zielinski, 2015. "Unemployment And Labor Market Policy In Visegrad Group Countries," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 10(3), pages 185-201, September.
    6. Clément Carbonnier, 2015. "Payroll Taxation, qualifications, wages and unemployment rates in a frictional labor market with productive interactions between segments," Working Papers hal-01203122, HAL.
    7. Xiangbo Liu & Theodore Palivos & Xiaomeng Zhang, 2017. "Immigration, Skill Heterogeneity, And Qualification Mismatch," Economic Inquiry, Western Economic Association International, vol. 55(3), pages 1231-1264, July.

    More about this item

    Keywords

    Matching Taxation Unemployment policy;

    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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