The Effect of Low-Wage Subsidies on Skills and Employment
We explore the far-reaching implications of low-wage subsidies on skill formation, aggregate employment and welfare. Low-wage subsidies have three important effects. First, they promote employment of low-skilled workers (who tend to be the ones who earn low wages). Second, by raising the payoff of low-skilled work relative to skilled work, low-wage subsidies reduce the incentive to become skilled. So they increase the low-skilled labor force which faces a relatively low employment rate. Third, the government budget constraint has to be taken into account, which is supposed to cause an additional tax burden for the skilled workers. This amplifies the negative effect of low-wage subsidies on the incentive to acquire human capital. Thus, the first effect on the one hand and the second and third effect on the other hand pull in opposite directions in terms of employment. This paper presents a theoretical model of the labor market in which these effects can be analyzed. We then calibrate the model with respect to the German labor market to shed light on the relative strengths of these effects and thereby assess the degree to which low-wage subsidies encourage or discourage employment. The calibration shows that low-wage subsidies have a negligible effect on aggregate employment. Although they do stimulate low-skilled employment, they also reduce medium-skilled employment, and the net effect is very small.
|Date of creation:||Sep 2006|
|Date of revision:|
|Contact details of provider:|| Postal: Kiellinie 66, D-24105 Kiel|
Phone: +49 431 8814-1
Fax: +49 431 85853
Web page: http://www.ifw-kiel.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- V. Joseph Hotz & John Karl Scholz, 2001.
"The Earned Income Tax Credit,"
NBER Working Papers
8078, National Bureau of Economic Research, Inc.
- Oskamp, Frank & Snower, Dennis J., 2007. "Interactions between employment and training policies," Kiel Working Papers 1389, Kiel Institute for the World Economy (IfW).
- Dale T. Mortensen & Christopher A. Pissarides, 1993.
"Job Creation and Job Destruction in the Theory of Unemployment,"
CEP Discussion Papers
dp0110, Centre for Economic Performance, LSE.
- Dale T. Mortensen & Christopher A. Pissarides, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 397-415.
- Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 19 pages.
- René Fahr & Uwe Sunde, 2004.
"Occupational job creation: patterns and implications,"
Oxford Economic Papers,
Oxford University Press, vol. 56(3), pages 407-435, July.
- Fahr, René & Sunde, Uwe, 2004. "Occupational job creation: Patterns and implications," Munich Reprints in Economics 20488, University of Munich, Department of Economics.
- Charlot, Olivier & Decreuse, Bruno & Granier, Pierre, 2005. "Adaptability, productivity, and educational incentives in a matching model," European Economic Review, Elsevier, vol. 49(4), pages 1007-1032, May.
- 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.
- E. Paul Durrenberger, 2005. "Labour," Chapters, in: A Handbook of Economic Anthropology, chapter 8 Edward Elgar Publishing.
- Fahr, René & Sunde, Uwe, 2001. "Disaggregate Matching Functions," IZA Discussion Papers 335, Institute for the Study of Labor (IZA).
- James Albrecht & Susan Vroman, 2002.
"A Matching Model with Endogenous Skill Requirements,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 283-305, February.
- James Albrecht & Susan Vroman, 2000. "A Matching Model with Endogenous Skill Requirements," Econometric Society World Congress 2000 Contributed Papers 0774, Econometric Society.
- Orszag, Mike & Snower, Dennis J., 1997.
"Youth Unemployment and Government Policy,"
CEPR Discussion Papers
1675, C.E.P.R. Discussion Papers.
- Wilke, Ralf A., 2004.
"New Estimates of the Duration and Risk of Unemployment for West-Germany,"
ZEW Discussion Papers
04-26, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Ralf A. Wilke, 2005. "New Extimates of the Duration and Risk of Unemployment for West-Germany," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 125(2), pages 207-237.
- Nada Eissa & Hilary W. Hoynes, 2006.
"Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply,"
in: Tax Policy and the Economy, Volume 20, pages 73-110
National Bureau of Economic Research, Inc.
- Hilary W. Hoynes & Nada Elissa, 2005. "Behavioral Responses to Taxes:Lessons from the EITC and Labor Supply," Working Papers 529, University of California, Davis, Department of Economics.
- Nada Eissa & Hilary Hoynes, 2005. "Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply," NBER Working Papers 11729, National Bureau of Economic Research, Inc.
- Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
- Michalopoulos, Charles & Robins, Philip K. & Card, David, 2005. "When financial work incentives pay for themselves: evidence from a randomized social experiment for welfare recipients," Journal of Public Economics, Elsevier, vol. 89(1), pages 5-29, January.
- Danthine, Samuel, 2005. "Two-Sided Search, Heterogeneous Skills and Labor Market Performance," IZA Discussion Papers 1572, Institute for the Study of Labor (IZA).
- Kenneth I. Wolpin, 2007. "Ex Ante Policy Evaluation, Structural Estimation and Model Selection," American Economic Review, American Economic Association, vol. 97(2), pages 48-52, May.
- Wienert, Helmut, 2006. "Simulation privater Bildungserträge: Lehre bringt Traumrenditen," Wirtschaftsdienst – Zeitschrift für Wirtschaftspolitik (1949 - 2007), ZBW – German National Library of Economics / Leibniz Information Centre for Economics, vol. 86(10), pages 660-664.
- Siebert, Horst & Stähler, Frank, 1994.
"Sozialtransfer und Arbeitsangebot,"
Kiel Working Papers
648, Kiel Institute for the World Economy (IfW).
- Yu-Fu Chen & Michael Funke, 2005.
"Non-Wage Labour Costs, Policy Uncertainty and Labour Demand - a Theoretical Assessment,"
Quantitative Macroeconomics Working Papers
20511, Hamburg University, Department of Economics.
- Yu-Fu Chen & Michael Funke, 2005. "Non-Wage Labour Costs, Policy Uncertainty And Labour Demand - A Theoretical Assessment," Scottish Journal of Political Economy, Scottish Economic Society, vol. 52(5), pages 687-709, November.
- Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991.
"Unemployment: Macroeconomic Performance and the Labour Market,"
Oxford University Press, number 9780198284345, December.
- Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, December.
- James Heckman & Lance Lochner & Ricardo Cossa, 2002. "Learning-By-Doing Vs. On-the-Job Training: Using Variation Induced by the EITC to Distinguish Between Models of Skill Formation," NBER Working Papers 9083, National Bureau of Economic Research, Inc.
- Warren, Ronald Jr., 1996. "Returns to scale in a matching model of the labor market," Economics Letters, Elsevier, vol. 50(1), pages 135-142, January.
- Hans-Werner Sinn & Christian Holzner & Wolfgang Meister & Wolfgang Ochel & Martin Werding, 2006. "Aktivierende Sozialhilfe 2006 - das Kombilohn-Modell des ifo Instituts," Ifo Schnelldienst, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 59(02), pages 06-27, 01.
- Boss, Alfred & Elendner, Thomas, 2003. "Steuerreform und Lohnsteueraufkommen in Deutschland - Simulationen auf Basis der Lohnsteuerstatistik," Open Access Publications from Kiel Institute for the World Economy 3126, Kiel Institute for the World Economy (IfW).
- Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October.
When requesting a correction, please mention this item's handle: RePEc:kie:kieliw:1292. 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: (Dieter Stribny)
If references are entirely missing, you can add them using this form.