Comparing the effectiveness of employment subsidies

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.

Eingliederungszuschüsse und Entlohnung: empirische Evidenz auf Basis von Individualdaten

“…Within this branch of the literature, an important distinction has to be made between general wage subsidies -paid to all low-wage workers -and targeted wage subsidies or hiring subsidies that are tailored to particular groups of unemployed persons. In addition to developing their own models, Brown et al (2006) as well as Jahn and Wagner (2008) summarize the comprehensive literature in this field. An important feature of most studies is that wages are the result of a Nash bargain and that part of the subsidy is handed over to workers through rent sharing.…”

Can hiring subsidies benefit the unemployed?

“…Such revenue and savings can, in turn, be used to finance the subsidies and make them very cost-effective. They could even be self-financing, as evidenced, for example, in an impact projection study for Germany and an evaluation study for France [5], [13].…”

“…In this respect, hiring subsidies evaluated in Germany provide some useful insights [13]. These involved "lump-sum" hiring subsidies that led to positive employment effects mainly through transition effects.…”

“…Consequently, on the one hand they generated a higher risk of stigmatization, and on the other hand they may have been confusing, overlapping with respect to target groups, and also more administratively cost-intensive [13].…”

“…To maximize positive competition, transition, and screening effects, hiring subsidies should be targeted at outsiders in the labor market, especially the long-term unemployed [11], [13]. Targeting the long-term unemployed also reduces costly deadweight and may avoid targeting too tightly and stigmatizing workers.…”