Do wage subsidies work in boosting economic inclusion? Evidence on e

Developed countries are investing a considerable amount of financial resources on active labour market programs such as training schemes, employment subsidies and public sector job creation, aiming to tackle the problem of persisting unemployment. Along with their rising efforts in this field, governments increasingly recognize the need for rigorous evaluation of the programs they implement. They seek knowledge about which programs work for whom and thus should be continued, improved or abandoned. Even more so in times of fiscal restraints, they strive to optimize policy design towards a more effective and cost-efficient targeting of resources, which requires detailed empirical evidence on program impacts. This paper contributes to extend the current knowledge on the heterogeneous effects of targeted wage subsidies that cover a share of labour costs and are granted temporarily to employers who decide to recruit from particular groups of unemployed individuals, namely those who are long-term unemployed or normally receive unemployment insurance and are at risk of becoming long-term unemployed. Whereas earlier micro-econometric impact evaluations often lack a long-term perspective and tend to concentrate on the overall average program impact as well as a small subset of possible outcomes, we identify short-run (1 year), medium-run (3 years) and long-run effects (7 years) of the Austrian wage subsidy scheme on a variety of labour market outcomes for a large number of target groups. Based on a thorough investigation of selection into treatment, we identify the overall causal impact of program participation on the subsequent labour market integration for adult individuals aged 25-54 years as well as the possible effect heterogeneity across the dimensions gender, age, education, nationality, disability status, and pre-treatment unemployment duration. Furthermore, we recover the treatment effect for females re-entering the labour market after a family-related career break. Hence, we bring forward the question, whether the program works at all in enhancing the employment and earning prospects of the participants and, if so, for whom. We employ a semi-parametric two-stage propensity score matching approach to solve the fundamental evaluation problem (as outlined by the potential outcomes framework), to deal with potential selection bias and to estimate causal program effects. Thus, we rely on exceptionally rich administrative micro-data (the Austrian social security database and the Austrian unemployment register) as well as some identifying assumptions (SUTVA, CIA, and common support) and mimic ex post an experiment by comparing the labour market outcomes of treated and non-treated individuals who are as similar as possible in terms of all observable characteristics that influence both participation and outcomes. Our parameter of interest is the average treatment effect on the treated (ATT), which is calculated as the difference in outcomes between participants and matched non-participants. Presuming the potential occurence of dead-weight loss, two different matching scenarios are constructed. In addition to comparing participants' outcomes with those of all previously unemployed non-participants in a first scenario, we compare in a second scenario the labour market trajectories of subsidized individuals with those of matched workers who have in the same time period taken up non-subsidized employment. Our idea is that the first scenario applies to a case, where dead-weight e ffects have been completely avoided, whereas the second scenario would be appropriate, if all subsidies were granted to employers for the hiring of workers who would have been recruited anyways. We argue that, if participants and non-participants simultaneously taking up employment turn out to share similar work trajectories, the two matching scenarios yield an upper and a lower bound estimate of the program impact net of dead-weight loss. From a theoretical perspective, employer-sided wage subsidies may raise the employment and earnings prospects of the supported job-seekers through several mechanisms. The prime effect sought by policy-makers is to stimulate the competitiveness and thus the demand for disadvantaged workers, by temporarily reducing labour costs to employers of employing this targeted group. In this regard, we expect that – compared to all previously unemployed non-participants – wage subsidies reduce the participants' subsequent time in unemployment and out of the labour force and increase their time in employment, once the observation period sufficiently overlasts initial "locking-in effects" during program duration. However, since it is possible that wage subsidies have negative stigmatization and signaling effects to employers, their effect is a priori not clear. This holds true particularly for earning outcomes. In case that subsidized employment increases the participants' subsequent time in employment, it is likely to reduce welfare loss associated with unemployment and to raise cumulated wages. As regards income at job-take-up, firms might on the one hand interpret program participation as a negative signal for the productivity and therefore off er relatively low wages. On the other hand, it seems reasonable to expect that part of the subsidy is passed on to the employees. Overall, we expect that the average wage level during employment does not diff er significantly between treated and untreated individuals in the post-treatment period, but that employment gains translate into higher cumulated wages for subsidized workers. In addition to considering employment and earning outcomes separately, this paper combines information on employment stability and income into a comprehensive indicator that measures the probability of earning a stable income which is at least nearly as high as it was before entry into unemployment. We test the hypothesis that participation in the Austrian wage subsidy scheme is an eff ective tool to expand economic inclusion in the sense that it increases the participants' chances of reaching this outcome. Given a long time-horizon and a large number of outcome measures and of subpopulations considered, the evaluation provides valuable information for the future design of labour market policies, in particular the optimal targeting of employer-sided wage subsidies.