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On the Welfare Effect of a Wage Subsidy on Youth Labor: Italy’s CFL Program

  • Bruno Contini
  • Federico Revelli

While a vast literature has analysed the wage and employment effects of active labor market programs (ALMPs), a welfare analysis of such programs is seldom implemented (Kluve and Schmidt, 2002). In an attempt to measure the welfare effect of a wage subsidy on youth labor, this paper performs a rudimentary cost-benefit analysis of Italy’s training and employment enhancing program directed at young workers (CFL, Contratti di Formazione e Lavoro). In particular, the analysis highlights the fact that the welfare effect of a targeted wage subsidy – in the form of a payroll tax rebate for firms employing youth labor – crucially depends on whether the labor market is affected by previous fiscal distortions generated either by the absence of linkage between payroll tax revenues and workers’ benefit, or by the presence of a wage floor. Based on reasonable estimates of youth labor demand and labor supply elasticities, it turns out that, in the absence of linkage between payroll tax revenues and benefits to young workers, the introduction of a 15% wage subsidy can be expected to generate a small employment gain (1 to 3 percentage points), and a net welfare gain – measured by the Marshallian approximation of employers’ and workers’ surplus – of less than €30 million (around 5% of the total cost of the welfare programme, amounting to almost €600 million), that could well be offset when the general equilibrium consequences of the selective wage subsidy are allowed for (substitution of non-eligible workers). On the other hand, in the presence of a wage floor that equals the current wage of young CFL workers, and a status quo youth involuntary unemployment rate of 18%, it is estimated that the 15% wage subsidy can generate a youth employment rise of up to 15 percentage points, and a net welfare gain of over €300 million – almost 50% of the total cost of the welfare programme.

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Paper provided by LABORatorio R. Revelli, Centre for Employment Studies in its series LABORatorio R. Revelli Working Papers Series with number 36.

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Length: 19 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:cca:wplabo:36
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  1. Snower, Dennis J, 1994. "Converting Unemployment Benefits into Employment Subsidies," American Economic Review, American Economic Association, vol. 84(2), pages 65-70, May.
  2. Phelps, Edmund S, 1994. "Low-Wage Employment Subsidies versus the Welfare State," American Economic Review, American Economic Association, vol. 84(2), pages 54-58, May.
  3. B Bell & Stephen Nickell, 1996. "Would Cutting Payroll Taxes on the Unskilled Have a Significant Effect on Unemployment?," CEP Discussion Papers dp0276, Centre for Economic Performance, LSE.
  4. Summers, Lawrence H, 1989. "Some Simple Economics of Mandated Benefits," American Economic Review, American Economic Association, vol. 79(2), pages 177-83, May.
  5. Bruno Contini & Francesca Cornaglia & Claudio Malpede & Enrico Rettore, 2002. "Measuring the Impact of the Italian CFL Programme on the Job Opportunities for the Young," LABORatorio R. Revelli Working Papers Series 11, LABORatorio R. Revelli, Centre for Employment Studies.
  6. Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-76, September.
  7. William P. Warburton & Carol L. Frketich, 1996. "Toward More Complete Cost Benefit Analysis of Wage Subsidy Programs," Canadian Journal of Economics, Canadian Economics Association, vol. 29(s1), pages 89-92, April.
  8. Bruno Contini & Fabio Rapiti, 1999. "'Young In, Old Out' Revisited: New Patterns of Employment Replacement in the Italian Economy," International Review of Applied Economics, Taylor & Francis Journals, vol. 13(3), pages 395-415.
  9. Jochen Kluve & Christoph M. Schmidt, 2002. "Can training and employment subsidies combat European unemployment?," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 409-448, October.
  10. P. B. Sørensen, 1997. "Public finance solutions to the European unemployment problem?," Economic Policy, CEPR;CES;MSH, vol. 12(25), pages 221-264, October.
  11. Lawrence F. Katz, 1996. "Wage Subsidies for the Disadvantaged," NBER Working Papers 5679, National Bureau of Economic Research, Inc.
  12. Stephen H. Bell & Larry L. Orr, 1994. "Is Subsidized Employment Cost Effective for Welfare Recipients? Experimental Evidence from Seven State Demonstrations," Journal of Human Resources, University of Wisconsin Press, vol. 29(1), pages 42-61.
  13. Daniel T. Slesnick, 1998. "Empirical Approaches to the Measurement of Welfare," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2108-2165, December.
  14. Lawrence H. Goulder & Roberton C. Williams III, 2003. "The Substantial Bias from Ignoring General Equilibrium Effects in Estimating Excess Burden, and a Practical Solution," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 898-927, August.
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