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Wage-Rate Subsidies for Dislocated Workers

In: Long-term Unemployment and Reemployment Policies



An array of innovative policies has been suggested to address more effectively the needs of dislocated workers. In this paper, we model and simulate the impacts of a wage-rate subsidy (or salary supplement) program in which a dislocated worker who becomes reemployed would receive a payment equal to one-half the difference between the wage previously earned and the wage currently earned. The simulations are based on a search model that is institutionally rich and that provides estimates of the impacts of a wage subsidy by incorporating empirical results from the reemployment bonus experiments that were conducted in the mid- to late-1980s. The model includes several groups of workers other than dislocated workers and therefore provides estimates of the degree to which these other workers might be crowded out of jobs by the wage subsidy program. The results suggest that a wage-rate subsidy paid for two years after reemployment would shorten the unemployment spells of dislocated workers by nearly 2 weeks, and would increase employment of dislocated workers by about 900 to 1000 per 100,000 in the labor force. But the simulations also raise the possibility that the gains for dislocated workers could come at the expense of other groups of workers; that is, other groups of workers could experience small increases in unemployment duration, and decreases in employment levels that almost fully offset the gains for dislocated workers. Three factors may mitigate these crowding-out results crowding out is widely dispersed over various groups of non-dislocated workers, the structural changes that result in dislocation of some workers (and drive the need for a policy like a wage subsidy) benefit non-dislocated workers, and the crowding-out results are quite sensitive to one of our assumptions. We also compare the wage-rate subsidy program with a reemployment bonus, and show that the two can be structured so as to give identical results.
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Suggested Citation

  • Carl Davidson & Stephen A. Woodbury, 2000. "Wage-Rate Subsidies for Dislocated Workers," Book chapters authored by Upjohn Institute researchers,in: Laurie J. Bassi & Stephen A. Woodbury (ed.), Long-term Unemployment and Reemployment Policies, pages 141-184 W.E. Upjohn Institute for Employment Research.
  • Handle: RePEc:upj:uchaps:cdsawjai

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    References listed on IDEAS

    1. Jacobson, Louis S & LaLonde, Robert J & Sullivan, Daniel G, 1993. "Earnings Losses of Displaced Workers," American Economic Review, American Economic Association, vol. 83(4), pages 685-709, September.
    2. Davidson, Carl & Woodbury, Stephen A, 1993. "The Displacement Effect of Reemployment Bonus Programs," Journal of Labor Economics, University of Chicago Press, vol. 11(4), pages 575-605, October.
    3. Louis S. Jacobson & Robert J. LaLonde & Daniel G. Sullivan, 1993. "Long-term earnings losses of high-seniority displaced workers," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 2-20.
    4. Rebecca M. Blank & David E. Card, 1991. "Recent Trends in Insured and Uninsured Unemployment: Is There an Explanation?," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1157-1189.
    5. Hurd, Michael D. & Pencavel, John H., 1981. "A utility-based analysis of the wage subsidy program," Journal of Public Economics, Elsevier, vol. 15(2), pages 185-201, April.
    6. Katz, Lawrence F. & Meyer, Bruce D., 1990. "The impact of the potential duration of unemployment benefits on the duration of unemployment," Journal of Public Economics, Elsevier, vol. 41(1), pages 45-72, February.
    7. Daniel S. Hamermesh, 1987. "What Do We Know About Worker Displacement in the U.S.?," NBER Working Papers 2402, National Bureau of Economic Research, Inc.
    8. Patricia M. Anderson & Bruce D. Meyer, 1994. "Unemployment Insurance Benefits and Takeup Rates," NBER Working Papers 4787, National Bureau of Economic Research, Inc.
    9. Kim B. Clark & Lawrence H. Summers, 1982. "Unemployment Insurance and Labor Force Transitions," NBER Working Papers 0920, National Bureau of Economic Research, Inc.
    10. Stephen A. Woodbury, 2009. "Unemployment," Chapters,in: Labor and Employment Law and Economics, chapter 17 Edward Elgar Publishing.
    11. repec:mpr:mprres:1134 is not listed on IDEAS
    12. Phillip B. Levine, 1993. "Spillover Effects between the Insured and Uninsured Unemployed," ILR Review, Cornell University, ILR School, vol. 47(1), pages 73-86, October.
    13. Peter A. Diamond, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Oxford University Press, vol. 49(2), pages 217-227.
    14. Paul T. Decker & Christopher J. O'Leary, 1991. "An Analysis of Pooled Evidence from the Pennsylvania and Washington Reemployment Bonus Demonstrations," Mathematica Policy Research Reports 458eec364eac40c390e6d78c9, Mathematica Policy Research.
    15. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-979, December.
    16. Stephen A. Woodbury, 2009. "Unemployment," Chapters,in: Labor and Employment Law and Economics, chapter 17 Edward Elgar Publishing.
    17. Abraham, Katharine G, 1983. "Structural-Frictional vs. Deficient Demand Unemployment: Some New Evidence," American Economic Review, American Economic Association, vol. 73(4), pages 708-724, September.
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    Cited by:

    1. Christian, GOEBEL, 2006. "The effect of temporary employment subsidies on employment duration," Discussion Papers (ECON - Département des Sciences Economiques) 2006035, Université catholique de Louvain, Département des Sciences Economiques.
    2. Carl Davidson & Stephen A. Woodbury, 1996. "Unemployment Insurance and Unemployment Implications of the Reemployment Bonus Experiments," Book chapters authored by Upjohn Institute researchers,in: Advisory Council on Unemployment Compensation: Background Papers, volume 3, pages KK1-KK37 W.E. Upjohn Institute for Employment Research.
    3. Carl Davidson & Stephen A. Woodbury, 2001. "From Social Experiment to Program," Book chapters authored by Upjohn Institute researchers,in: Philip K. Robins & Robert G. Spiegelman (ed.), Reemployment Bonuses in the Unemployment Insurance System: Evidence from Three Field Experiments, chapter 6, pages 175-222 W.E. Upjohn Institute for Employment Research.
    4. Mortensen, Dale T & Pissarides, Christopher, 2001. "Taxes, Subsidies and Equilibrium Labour Market Outcomes," CEPR Discussion Papers 2989, C.E.P.R. Discussion Papers.
    5. Kevin Hollenbeck, 2015. "Promoting Retention or Reemployment of Workers After a Significant Injury or Illness," Mathematica Policy Research Reports 99caa302888a4be68d16d276c, Mathematica Policy Research.
    6. Heckman, James J. & Lalonde, Robert J. & Smith, Jeffrey A., 1999. "The economics and econometrics of active labor market programs," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 31, pages 1865-2097 Elsevier.
    7. Stephen A. Wandner, 2016. "Wage Insurance as a Policy Option in the United States," Upjohn Working Papers and Journal Articles 16-250, W.E. Upjohn Institute for Employment Research.
    8. Lawrence F. Katz, 1996. "Wage Subsidies for the Disadvantaged," NBER Working Papers 5679, National Bureau of Economic Research, Inc.

    More about this item


    wage subsidies; dislocated workers; displaced workers; long-term unemployment;

    JEL classification:

    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy


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