Comment on «Investment or Employment Subsidies for Rapid Employment Creation in the EEC»

Abstract

The title of the paper presupposes that there is a choice only between investment or employment subsidies in job creation. Perhaps this was not the intention of the author but by the bottom of p.2. it is clear that «first best» remedies for unemployment have been dismissed as undesirable or impractical. Before moving on to discuss the body of the paper I think that an important issue has been brushed aside here. Why not tackle the wage rigidities that are held responsible for the high unemployment directly? Why not dismantle the existing structure of subsidies on capital and taxes on labour as a first step? Perhaps then the nature of the unemployment problem will be more clearly seen. Determination to remove factor price distortions which arise either because of tax-subsidy arrangements or restrictive labour practices can overcome the objection that this strategy will take too long.It is plain that even if one accepts the raison d’être of the paper there is also a lack of information with which to apply a Marginal Employment Subsidy (MES). The natural rate of unemployment is unobservable and hence only approximately known. Also there is the problem of structural unemployment caused by a mis-match of skills of the unemployed with vacancies created by an MES. It is difficult to see a 55 year old male steel-worker being re-employed as an assistant in a sweet shop, but something of this sort is implied by the analysis. Also, there are the risks associated with an MES. The first is the risk of creating an artificial situation of excess labour demand for certain skills or in certain industries causing an increase in real wages which would be readily mimicked by other sectors of the economy. Second, there is the risk that in creating a further distortion to factor prices on the pretext of a short-term remedy, the subsidy would, like its predecessors, become a permanent feature and prevent desirable labour market adjustments taking place in future years. Third, there is the risk of giving expanding firms a cost advantage in their industry which, as their market share grows, becomes self-perpetuating.