IDEAS home Printed from https://ideas.repec.org/p/zbw/ifwkwp/1302.html
   My bibliography  Save this paper

Comparing the effectiveness of employment subsidies

Author

Listed:
  • Brown, Alessio J. G.
  • Merkl, Christian
  • Snower, Dennis J.

Abstract

This paper provides a theoretical and quantitative analysis of various types of wellknown employment subsidies. Two important questions are addressed: (i) How should employment subsidies be targeted? (ii) How large should the subsidies be? We consider measures involving targeting workers with low incomes/abilities and targeting the unemployed. To make our analysis particularly useful to policy makers, we focus on policies that are "approximately welfare efficient", i.e. policies that (a) improve employment and welfare, (b) do not raise earnings inequality and (c) are self-financing. This criterion enables us to identify policies which satisfy these favorable properties and to determine the size of the subsidies required for this purpose. We construct a simple, dynamic model of hiring and separations, derived from microfoundations, and calibrate it with German data. The calibration shows that hiring vouchers targeted at the long-term unemployed and low-income/ability workers can be approximately welfare efficient, while low-wage subsidies do not satisfy this criterion. Even in terms of inequality reduction low-wage subsidies are outperformed by targeted hiring vouchers. Furthermore, hiring vouchers targeted at the long-term unemployed are more effective than hiring vouchers targeted at low-income/ability workers. These subsidy rankings also hold if the self-financing constraint is relaxed and the government spends a given additional amount on the subsidies.

Suggested Citation

  • Brown, Alessio J. G. & Merkl, Christian & Snower, Dennis J., 2006. "Comparing the effectiveness of employment subsidies," Kiel Working Papers 1302, Kiel Institute for the World Economy (IfW Kiel).
  • Handle: RePEc:zbw:ifwkwp:1302
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/3909/1/kap1302.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Dickens, William T & Lang, Kevin, 1988. "The Reemergence of Segmented Labor Market Theory," American Economic Review, American Economic Association, vol. 78(2), pages 129-134, May.
    2. Brown, Alessio & Merkl, Christian & Snower, Dennis, 2015. "An Incentive Theory Of Matching," Macroeconomic Dynamics, Cambridge University Press, vol. 19(3), pages 643-668, April.
    3. Kremer, M & Maskin, E, 1996. "Wage Inequality and Segregation by Skill," Working papers 96-23, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. Gartner, Hermann & Merkl, Christian & Rothe, Thomas, 2012. "Sclerosis and large volatilities: Two sides of the same coin," Economics Letters, Elsevier, vol. 117(1), pages 106-109.
    5. Ken Binmore & Ariel Rubinstein & Asher Wolinsky, 1986. "The Nash Bargaining Solution in Economic Modelling," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 176-188, Summer.
    6. David T. Coe & Dennis J. Snower, 1997. "Policy Complementarities: The Case for Fundamental Labor Market Reform," IMF Staff Papers, Palgrave Macmillan, vol. 44(1), pages 1-35, March.
    7. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    8. Woodbury, Stephen A & Spiegelman, Robert G, 1987. "Bonuses to Workers and Employers to Reduce Unemployment: Randomized Trials in Illinois," American Economic Review, American Economic Association, vol. 77(4), pages 513-530, September.
    9. Garloff, Alfred & Fitzenberger, Bernd & Kohn, Karsten, 2003. "Beschäftigung und Lohnstrukturen nach Qualifikationen und Altersgruppen: Eine empirische Analyse auf Basis der IAB-Beschäftigtenstichprobe," ZEW Discussion Papers 03-75, ZEW - Leibniz Centre for European Economic Research.
    10. Orszag, Mike & Snower, Dennis J., 1998. "Anatomy of Policy Complementarities," CEPR Discussion Papers 1963, C.E.P.R. Discussion Papers.
    11. Gilles Saint Paul, 1998. "The political consequences of unemployment," Economics Working Papers 343, Department of Economics and Business, Universitat Pompeu Fabra.
    12. J. Michael Orszag & Dennis Snower, 1999. "Youth unemployment and government policy," Journal of Population Economics, Springer;European Society for Population Economics, vol. 12(2), pages 197-213.
    13. Orszag, Mike & Snower, Dennis J., 1998. "Anatomy of policy complementarities," Open Access Publications from Kiel Institute for the World Economy 2252, Kiel Institute for the World Economy (IfW Kiel).
    14. Gabriele Cardullo & Bruno Van der Linden, 2007. "Employment Subsidies and Substitutable Skills: An Equilibrium Matching Approach," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 53(4), pages 375-404.
    15. Lars Ljungqvist & Thomas J. Sargent, 1998. "The European Unemployment Dilemma," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 514-550, June.
    16. Orszag, Jonathan Michael & Snower, Dennis J., 2000. "The effectiveness of employment vouchers: a simple approach," Open Access Publications from Kiel Institute for the World Economy 2519, Kiel Institute for the World Economy (IfW Kiel).
    17. Ronald Bachmann, 2005. "Labour Market Dynamics in Germany: Hirings, Separations, and Job-to-Job Transitions over the Business Cycle," SFB 649 Discussion Papers SFB649DP2005-045, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    18. René Fahr & Uwe Sunde, 2004. "Occupational job creation: patterns and implications," Oxford Economic Papers, Oxford University Press, vol. 56(3), pages 407-435, July.
    19. Bovenberg, A. Lans & Graafland, Johan J. & de Mooij, Ruud A., 2000. "Tax reform and the Dutch labor market: an applied general equilibrium approach," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 193-214, October.
    20. 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.
    21. Stephen A. Woodbury, 2009. "Unemployment," Book chapters authored by Upjohn Institute researchers, in: Kenneth G. Dau-Schmidt & Seth D. Harris & Orley Lobel (ed.),Labor and Employment Law and Economics, volume 2, pages 480-516, W.E. Upjohn Institute for Employment Research.
    22. E. Paul Durrenberger, 2005. "Labour," Chapters, in: James G. Carrier (ed.), A Handbook of Economic Anthropology, chapter 8, Edward Elgar Publishing.
    23. Yu-Fu Chen & Michael Funke, 2003. "Labour Demand in Germany: An Assessment of Non- Wage Labour Costs," Dundee Discussion Papers in Economics 154, Economic Studies, University of Dundee.
    24. Lindbeck, Assar & Snower, Dennis J, 1987. "Strike and Lock-Out Threats and Fiscal Policy," Oxford Economic Papers, Oxford University Press, vol. 39(4), pages 760-784, December.
    25. Lechthaler, Wolfgang & Merkl, Christian & Snower, Dennis J., 2010. "Monetary persistence and the labor market: A new perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 968-983, May.
    26. 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, January.
    27. Michael Kremer & Eric Maskin, 1996. "Wage Inequality and Segregation," Harvard Institute of Economic Research Working Papers 1777, Harvard - Institute of Economic Research.
    28. Keane, Michael P & Wolpin, Kenneth I, 1997. "The Career Decisions of Young Men," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 473-522, June.
    29. Christopher J. O’Leary & Paul T. Decke & Stephen A. Wandner, 2005. "Cost-Effectiveness of Targeted Reemployment Bonuses," Journal of Human Resources, University of Wisconsin Press, vol. 40(1).
    30. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877.
    31. Orszag, J. Michael & Snower, Dennis J., 2003. "Designing employment subsidies," Labour Economics, Elsevier, vol. 10(5), pages 557-572, October.
    32. Saint-Paul, Gilles, 1995. "Some political aspects of unemployment," European Economic Review, Elsevier, vol. 39(3-4), pages 575-582, April.
    33. Snower, Dennis J. & Merkl, Christian, 2006. "The caring hand that cripples: The East German labor market after reunification (detailed version)," Kiel Working Papers 1263, Kiel Institute for the World Economy (IfW Kiel).
    34. Stephan, Gesine, 2010. "Employer wage subsidies and wages in Germany : empirical evidence from individual data," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 43(1), pages 53-71.
    35. Robert E. Hall & Paul R. Milgrom, 2008. "The Limited Influence of Unemployment on the Wage Bargain," American Economic Review, American Economic Association, vol. 98(4), pages 1653-1674, September.
    36. Snower, Dennis J, 1994. "Converting Unemployment Benefits into Employment Subsidies," American Economic Review, American Economic Association, vol. 84(2), pages 65-70, May.
    37. Boss, Alfred, 2006. "Brauchen wir einen Kombilohn?," Kiel Working Papers 1279, Kiel Institute for the World Economy (IfW Kiel).
    38. Sunde, Uwe & Thalmaier, Anja & Zimmermann, Klaus F., 1999. "Arbeitsplätze für Geringqualifizierte," Wirtschaftsdienst – Zeitschrift für Wirtschaftspolitik (1949 - 2007), ZBW - Leibniz Information Centre for Economics, vol. 79(12), pages 723-730.
    39. Paul R. Krugman, 1994. "Past and prospective causes of high unemployment," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Jan, pages 49-98.
    40. J. Michael Orszag & Dennis J. Shower, 2000. "The Effectiveness of Employment Vouchers: A Simple Approach," German Economic Review, Verein für Socialpolitik, vol. 1(4), pages 385-419, November.
    41. Fahr, René & Sunde, Uwe, 2001. "Disaggregate Matching Functions," IZA Discussion Papers 335, Institute of Labor Economics (IZA).
    42. Boone, Jan & van Ours, Jan C., 2004. "Effective Active Labor Market Policies," IZA Discussion Papers 1335, Institute of Labor Economics (IZA).
    43. 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.
    44. Riphahn, Regina T. & Thalmaier, Anja & Zimmermann, Klaus F., 1999. "Schaffung von Arbeitsplätzen für Geringqualifizierte," IZA Research Reports 2, Institute of Labor Economics (IZA).
    45. Dennis J. Snower & Christian Merkl, 2006. "The Caring Hand that Cripples: The East German Labor Market after Reunification," American Economic Review, American Economic Association, vol. 96(2), pages 375-382, May.
    46. Boone, J. & van Ours, J.C., 2004. "Effective Labor Market Policies," Other publications TiSEM 9b8aece5-8c99-4420-b98f-6, Tilburg University, School of Economics and Management.
    47. Gartner, Hermann & Merkl, Christian & Rothe, Thomas, 2009. "They Are Even Larger! More (on) Puzzling Labor Market Volatilities," IZA Discussion Papers 4403, Institute of Labor Economics (IZA).
    48. Brian Bell & Richard Blundell & John Reenen, 1999. "Getting the Unemployed Back to Work: The Role of Targeted Wage Subsidies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(3), pages 339-360, August.
    49. Orszag, Mike & Snower, Dennis J., 2002. "Unemployment Vouchers versus Low-Wage Subsidies," IZA Discussion Papers 537, Institute of Labor Economics (IZA).
    50. 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 1-19.
    51. Stephan, Gesine, 2010. "Employer wage subsidies and wages in Germany : empirical evidence from individual data," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 43(1), pages 53-71.
    52. Lawrence F. Katz, 1996. "Wage Subsidies for the Disadvantaged," NBER Working Papers 5679, National Bureau of Economic Research, Inc.
    53. Wienert, Helmut, 2006. "Einkommensdifferenzen zwischen Nicht-Akademikern und Akademikern," Wirtschaftsdienst – Zeitschrift für Wirtschaftspolitik (1949 - 2007), ZBW - Leibniz Information Centre for Economics, vol. 86(2), pages 105-111.
    54. repec:hhs:iuiwop:500 is not listed on IDEAS
    55. Orszag J. Michael & Snower Dennis J., 2000. "The Effectiveness of Employment Vouchers: A Simple Approach," German Economic Review, De Gruyter, vol. 1(4), pages 385-419, December.
    56. 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.
    57. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    58. Hui, Weng T. & Trivedi, P. K., 1986. "Duration dependence, targeted employment subsidies and unemployment benefits," Journal of Public Economics, Elsevier, vol. 31(1), pages 105-129, October.
    59. 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 (IfW Kiel).
    60. Richard B. Freeman, 1995. "Are Your Wages Set in Beijing?," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 15-32, Summer.
    61. repec:ces:ifosdt:v::y:2006:i::p:06-27 is not listed on IDEAS
    62. Nicholas Kaldor, 1936. "Wage Subsidies as a Remedy for Unemployment," Journal of Political Economy, University of Chicago Press, vol. 44, pages 721-721.
    63. DREZE, Jacques H. & SNEESSENS, Henri, 1994. "Technical Development, Competition from Low-Wage Economies and Low-Skilled Unemployment," LIDAM Discussion Papers CORE 1994036, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    64. 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.
    65. Schnabel, Claus, 2005. "Gewerkschaften und Arbeitgeberverbände: Organisationsgrade, Tarifbindung und Einflüsse auf Löhne und Beschäftigung," Discussion Papers 34, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
    66. 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.
    67. Uwe Jirjahn & Christian Pfeifer & Georgi Tsertsvadze, 2009. "Mikroökonomische Beschäftigungseffekte des Hamburger Modells zur Beschäftigungsförderung - Evaluation eines Kombilohns," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 129(1), pages 37-82.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alessio Brown & Johannes Koettl, 2015. "Active labor market programs - employment gain or fiscal drain?," IZA Journal of Labor Economics, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-36, December.
    2. Oskamp, Frank & Snower, Dennis J., 2007. "Interactions between employment and training policies," Kiel Working Papers 1389, Kiel Institute for the World Economy (IfW Kiel).
    3. Lechthaler, Wolfgang & Merkl, Christian & Snower, Dennis J., 2010. "Monetary persistence and the labor market: A new perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 968-983, May.
    4. Gartner, Hermann & Merkl, Christian & Rothe, Thomas, 2012. "Sclerosis and large volatilities: Two sides of the same coin," Economics Letters, Elsevier, vol. 117(1), pages 106-109.
    5. Philip Schuster, 2010. "Labor Market Policy Instruments and the Role of Economic Turbulence," University of St. Gallen Department of Economics working paper series 2010 2010-29, Department of Economics, University of St. Gallen.
    6. Ester Faia & Wolfgang Lechthaler & Christian Merkl, 2014. "Labor Selection, Turnover Costs, and Optimal Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(1), pages 115-144, February.
    7. Brown, Alessio J. G. & Snower, Dennis J., 2009. "Incentives and complementarities of flexicurity," Kiel Working Papers 1526, Kiel Institute for the World Economy (IfW Kiel).
    8. Gartner, Hermann & Merkl, Christian & Rothe, Thomas, 2009. "They Are Even Larger! More (on) Puzzling Labor Market Volatilities," IZA Discussion Papers 4403, Institute of Labor Economics (IZA).
    9. Kienzler, Daniel, 2012. "Long-term Unemployment over the Business Cycle, Skill Loss, and Monetary Policy," Working Papers on Finance 1205, University of St. Gallen, School of Finance.
    10. Yashiv, Eran, 2007. "Labor search and matching in macroeconomics," European Economic Review, Elsevier, vol. 51(8), pages 1859-1895, November.
    11. repec:zbw:ifwkwp:1309 is not listed on IDEAS
    12. Merkl, Christian & Snower, Dennis J., 2008. "Escaping the unemployment trap: The case of East Germany," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 542-556, December.
    13. Brown, Alessio J.G. & Kohlbrecher, Britta & Merkl, Christian & Snower, Dennis J., 2021. "The effects of productivity and benefits on unemployment: Breaking the link," Economic Modelling, Elsevier, vol. 94(C), pages 967-980.
    14. Rogerson, Richard & Shimer, Robert, 2011. "Search in Macroeconomic Models of the Labor Market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 7, pages Pages: 61, Elsevier.
    15. Tito Boeri & Michael C. Burda, 2009. "Preferences for Collective Versus Individualised Wage Setting," Economic Journal, Royal Economic Society, vol. 119(540), pages 1440-1463, October.
    16. Gabriele Cardullo, 2010. "Matching Models Under Scrutiny: An Appraisal Of The Shimer Puzzle," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 622-656, September.
    17. Brown, Alessio & Merkl, Christian & Snower, Dennis, 2015. "An Incentive Theory Of Matching," Macroeconomic Dynamics, Cambridge University Press, vol. 19(3), pages 643-668, April.
    18. Kohlbrecher, Britta & Merkl, Christian & Nordmeier, Daniela, 2016. "Revisiting the matching function," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 350-374.
    19. Costain, James S. & Reiter, Michael, 2008. "Business cycles, unemployment insurance, and the calibration of matching models," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1120-1155, April.
    20. Merkl, Christian & Stüber, Heiko, 2016. "Wage cyclicalities and labor market dynamics at the establishment level: Theory and evidence," FAU Discussion Papers in Economics 12/2016, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    21. Amaral, Pedro S. & Tasci, Murat, 2016. "The cyclical behavior of equilibrium unemployment and vacancies across OECD countries," European Economic Review, Elsevier, vol. 84(C), pages 184-201.

    More about this item

    Keywords

    Hiring voucher; Employment; Unemployment; Duration; Self-financing; Targeting; Low wage subsidy;
    All these keywords.

    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:ifwkwp:1302. 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: . General contact details of provider: https://edirc.repec.org/data/iwkiede.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/iwkiede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.