Marginal wage subsidies: a rent-extracting instrument for employment creation
Purpose - This paper aims to examine the effects of marginal and general wage subsidies on employment and income distribution. Design/methodology/approach - The paper constructs a theoretical, partial-equilibrium model of an economy in which a large number of competitive firms produce a homogeneous output good. Involuntary unemployment arises from a too high and rigid wage. By conducting comparative static analyses, the paper evaluates the impact of general and marginal wage subsidies on employment and incomes. Findings - The paper shows that a marginal wage subsidy is a fiscally more efficient instrument for employment creation than a general wage subsidy because it resembles a combination of a general wage subsidy with a profit tax. These favorable effects persist even if between-firm displacement effects are taken into account. Research limitations/implications - In line with most of the literature on marginal employment subsidies, attention is restricted to a partial-equilibrium analysis in which the wage is assumed to be fixed. This helps to sharpen the focus on between-firm competition, but is perhaps implausible when analyzing a general-equilibrium setting. The inclusion of endogenous wage setting is bound to provide an interesting area for future research. Practical implications - If politicians want to implement a wage subsidy scheme that has to be self-financing, marginal wage subsidies are an effective policy instrument for employment creation. Its downside is an inefficient allocation of labor among firms, because some firms become larger than is necessary. Originality/value - The paper provides a novel approach to model the between-firm displacement effects of marginal wage subsidies and derives policy conclusions.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 36 (2009)
Issue (Month): 4 (September)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://www.emeraldinsight.com/jes.htm Email: