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Subsidizing low-skilled jobs in a dual labor market

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  • Pascal Belan

    (LEN, Université de Nantes)

  • Martine Carré

    () (CEPII, CREST and THEMA, Université de Cergy)

  • Stéphane Gregoir

    (CREST-INSEE)

Abstract

A large exclusion from the labor market or an important unemployment of low-skilled workers is observed in some developed economies in which a minimum wage has been introduced. In such circumstances, governments may adopt two kinds of policies. They may pay unemployment benefits or they may try to increase demand for low-skilled labor by subsidizing low-skilled jobs. In this paper, we propose a matching model which allows to analyze the effects of these policies on the labor market. In our framework, the government budget is balanced through taxes on occupied workers and classical and frictional unemployment simultaneously exist. The labor market is dual featuring low-skilled and high-skilled workers. Low-skilled jobs pay the minimum wage, while high-skilled wages result from bargaining. Moreover, high-skilled unemployed can apply for both types of jobs thereby accepting to be downgraded, while opportunities for low-skilled workers are limited to low-skilled jobs. We first give conditions for the existence and uniqueness of a steady- state equilibrium and we analyze the effects of several fiscal instruments. In this set-up, increasing low-skilled job subsidies does not necessarily reduce low-skilled unemployment or unemployment spells. We provided empirical evidence by calibrating our model on French labor market data, it is found that for five low-skilled workers leaving classical unemployment, two high-skilled workers are downgraded (although they might have been previously unemployed).

Suggested Citation

  • Pascal Belan & Martine Carré & Stéphane Gregoir, 2007. "Subsidizing low-skilled jobs in a dual labor market," THEMA Working Papers 2007-17, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  • Handle: RePEc:ema:worpap:2007-17
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    2. Clément Carbonnier, 2014. "Payroll Taxation and the structure of qualifications and wages in a segmented frictional labor market with intrafirm bargaining," THEMA Working Papers 2014-20, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    3. Michela Bia & Pierre-Jean Messe & Roberto Leombruni, 2010. "Young-in Old-out: a new evaluation," TEPP Working Paper 2010-14, TEPP.
    4. Vincent Charlet & Philippe Frocrain, 2017. "Les limites des allégements de charges sur les bas salaires," Working Papers hal-01695167, HAL.
    5. Mariusz Zielinski, 2015. "Unemployment And Labor Market Policy In Visegrad Group Countries," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 10(3), pages 185-201, September.
    6. Clément Carbonnier, 2015. "Payroll Taxation, qualifications, wages and unemployment rates in a frictional labor market with productive interactions between segments," Working Papers hal-01203122, HAL.
    7. Xiangbo Liu & Theodore Palivos & Xiaomeng Zhang, 2017. "Immigration, Skill Heterogeneity, And Qualification Mismatch," Economic Inquiry, Western Economic Association International, vol. 55(3), pages 1231-1264, July.

    More about this item

    Keywords

    Crowding-out; Matching; On-the-job search; Taxation;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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