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The effect of low-wage subsidies on skills and employment

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  • Oskamp, Frank
  • Snower, Dennis J.

Abstract

We explore the far-reaching implications of low-wage subsidies on aggregate employment. Low-wage subsidies have three important effects. First, they promote employment of unskilled workers (who tend to be the ones who earn low wages). Second, by raising the payoff of unskilled work relative to skilled work, low-wage subsidies reduce the incentive to become skilled, so that there are more unskilled workers associated with 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.

Suggested Citation

  • Oskamp, Frank & Snower, Dennis J., 2006. "The effect of low-wage subsidies on skills and employment," Kiel Working Papers 1292, Kiel Institute for the World Economy.
    • Handle: RePEc:zbw:ifwkwp:1292
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    Cited by:

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    3. Dennis J. Snower & Alessio J. G. Brown & Christian Merkl, 2009. "Globalization and the Welfare State: A Review of Hans-Werner Sinn's Can Germany Be Saved?," Journal of Economic Literature, American Economic Association, vol. 47(1), pages 136-158, March.
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    5. Aziza GARSAA & Nadine LEVRATTO & Luc TESSIER, 2015. "Do Exemptions From Social Security Contributions Affect Job Creation? New Empirical Evidence From French Overseas Regions," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 42, pages 79-104.
    6. Antonio Estache & Elena Ianchovichina & Robert Bacon & Ilhem Salamon, 2013. "Infrastructure and Employment Creation in the Middle East and North Africa," World Bank Publications - Books, The World Bank Group, number 12237, April.
    7. Ianchovichina, Elena & Estache, Antonio & Foucart, Renaud & Garsous, Grégoire & Yepes, Tito, 2013. "Job Creation through Infrastructure Investment in the Middle East and North Africa," World Development, Elsevier, vol. 45(C), pages 209-222.
    8. Dennis Snower & Alessio Brown & Christian Merkl, 2007. "Einstellungsgutscheine effektiver als Kombilöhne," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 60(04), pages 37-41, February.
    9. Brown, Alessio J. G. & Merkl, Christian & Snower, Dennis J., 2007. "Einstellungsgutscheine effektiver als Kombilöhne: Reformkonzepte zur Erhöhung der Beschäftigung im Niedriglohnbereich. Niedriglohnsektor," Open Access Publications from Kiel Institute for the World Economy 3966, Kiel Institute for the World Economy (IfW Kiel).
    10. Spermann Alexander, 2017. "Basic Income in Germany: Proposals for Randomised Controlled Trials using Nudges," Basic Income Studies, De Gruyter, vol. 12(2), pages 1-9, December.
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    Keywords

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    JEL classification:

    • I29 - Health, Education, and Welfare - - Education - - - Other
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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