IDEAS home Printed from https://ideas.repec.org/a/eme/jespps/v36y2009i4p393-410.html
   My bibliography  Save this article

Marginal wage subsidies: a rent-extracting instrument for employment creation

Author

Listed:
  • Andreas Knabe

Abstract

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.

Suggested Citation

  • Andreas Knabe, 2009. "Marginal wage subsidies: a rent-extracting instrument for employment creation," Journal of Economic Studies, Emerald Group Publishing, vol. 36(4), pages 393-410, September.
  • Handle: RePEc:eme:jespps:v:36:y:2009:i:4:p:393-410
    as

    Download full text from publisher

    File URL: http://www.emeraldinsight.com/10.1108/01443580910983807?utm_campaign=RePEc&WT.mc_id=RePEc
    Download Restriction: Access to full text is restricted to subscribers

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    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. Schöb, Ronnie, 2007. "Soziale Grundsicherung und Beschäftigung," Discussion Papers 2007/12, Free University Berlin, School of Business & Economics.
    3. Edward Nissan & Shahdad Naghshpour, 2013. "Connecting corruption to ethnic polarization and religious fractionalization," Journal of Economic Studies, Emerald Group Publishing, vol. 40(6), pages 763 - 774, November.

    More about this item

    Keywords

    Pay; Unemployment; Subsidies; Labour market;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:jespps:v:36:y:2009:i:4:p:393-410. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Virginia Chapman). General contact details of provider: http://www.emeraldinsight.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.