Kiel Working Papers, Kiel Institute for World Economics
No 1302:
Comparing the Effectiveness of Employment Subsidies
Alessio J. G. Brown,, Christian Merkl and Dennis J. Snower
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.
Keywords: low wage subsidy; hiring voucher; targeting; employment; unemployment; duration; self-financing; (follow links to similar papers)
JEL-Codes: J23,; J24,; J38,; J64,; J68; (follow links to similar papers)
28 pages, November 2006
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