Marginal Employment Subsidies Research Articles

Subsidizing extra jobs: promoting employment by taming the unions

We study the subsidization of extra jobs in a general equilibrium framework. While the previous literature focuses on symmetric marginal employment subsidies where firms are rewarded when they increase employment but punished when they reduce their workforce, we consider an asymmetric scheme that only rewards employment expansion. This changes the incidence substantially. In the asymmetric case without punishment, it becomes less costly for firms to lay off a substantial fraction of their workforce when trade unions raise wages. This tames the unions, which causes wage moderation and raises aggregate employment and welfare. For moderate subsidy rates, all unions prefer to restrain their wage claims. At sufficiently high subsidy rates, labour market conditions improve so much that some unions enforce higher wages and let their firms shrink. This displacement of firms might have a negative impact on employment and welfare.

Marginal wage subsidies: a rent‐extracting instrument for employment creation

PurposeThis paper aims to examine the effects of marginal and general wage subsidies on employment and income distribution.Design/methodology/approachThe paper constructs a theoretical, partial‐equilibrium model of an economy in which a large number of competitive firms produce a homogeneous output good. Involuntary unemployment arises from a too high and rigid wage. By conducting comparative static analyses, the paper evaluates the impact of general and marginal wage subsidies on employment and incomes.FindingsThe paper shows that a marginal wage subsidy is a fiscally more efficient instrument for employment creation than a general wage subsidy because it resembles a combination of a general wage subsidy with a profit tax. These favorable effects persist even if between‐firm displacement effects are taken into account.Research limitations/implicationsIn line with most of the literature on marginal employment subsidies, attention is restricted to a partial‐equilibrium analysis in which the wage is assumed to be fixed. This helps to sharpen the focus on between‐firm competition, but is perhaps implausible when analyzing a general‐equilibrium setting. The inclusion of endogenous wage setting is bound to provide an interesting area for future research.Practical implicationsIf politicians want to implement a wage subsidy scheme that has to be self‐financing, marginal wage subsidies are an effective policy instrument for employment creation. Its downside is an inefficient allocation of labor among firms, because some firms become larger than is necessary.Originality/valueThe paper provides a novel approach to model the between‐firm displacement effects of marginal wage subsidies and derives policy conclusions.

Marginal Employment Subsidization: A New Concept and a Reappraisal

In this paper, we attempt to renew the interest in marginal employment subsidies. Such subsidies are paid only for a firm's additional employment exceeding some reference level and create larger employment stimuli at lower fiscal costs than general wage subsidies for all workers. If the hiring of a new employee also entails subsidizing an incumbent worker (double marginal subsidization), the replacement of regular paid workers by outsourcing employment to newly established firms – a standard critique of marginal employment subsidies – can be avoided. This additional subsidy reduces the incentive to crowd out regular employment and results in even larger employment effects. Applying the subsidy scheme to the low-skill labor market in Germany, we show that employment can be substantially increased without imposing additional fiscal burden.

Marginal Employment Subsidization: A New Concept and a Reappraisal

In this paper, we attempt to renew the interest in marginal employment subsidies. Such subsidies are paid only for a firm's additional employment exceeding some reference level and create larger employment stimuli at lower fiscal costs than general wage subsidies for all workers. If the hiring of a new employee also entails subsidizing an incumbent worker (double marginal subsidization), the replacement of regular paid workers by outsourcing employment to newly established firms – a standard critique of marginal employment subsidies – can be avoided. This additional subsidy reduces the incentive to crowd out regular employment and results in even larger employment effects. Applying the subsidy scheme to the low-skill labor market in Germany, we show that employment can be substantially increased without imposing additional fiscal burden.

Labour costs and employment policy

Under the Government's New Deal proposals to help create jobs for the young unemployed, employers are offered marginal employment subsidies. Such interventions involve relative changes in the firm's fixed and variable labour costs. In turn, cost changes have implications for both employment and hours of work. This study examines possible strengths and weaknesses of employment policies that are designed to price young unemployed into jobs by reducing related labour costs. It focuses on one such intervention, the major restructuring of employers' National Insurance Contributions (NICs) in the 1985 Budget. This is then linked to the New Deal measures.

AN ECONOMIC ANALYSIS OF THE REVISED REGIONAL DEVELOPMENT GRANT SCHEME

This paper examines the factors underlying the take-up and effectiveness of the revised Regional Development Grant scheme, an instrument of U.K. regional policy operated between 1984 and 1988. Assistance under this scheme was available either as a proportionate capital grant or as a lump-sum marginal employment subsidy. Using a cost function approach and a Cobb-Douglas production function, conditions are derived determining take-up. Simulation suggests that assistance will generally be taken up as a job grant, and this is borne out by empirical evidence. Some implications for effectiveness are drawn. Copyright 1991 by Scottish Economic Society.

THE EMPLOYMENT and HOURS EFFECTS OF A MARGINAL EMPLOYMENT SUBSIDY

This paper extends a standard labor demand model in order to study the microeconomic effects of marginal employment subsidies. The analysis emphasizes the distinction between workers and hours per worker, and investigates subsidies with respect to both quasi-fixed and variable labor costs. The policy of granting marginal employment subsidies conditional on mandatory workweek reductions, as recently practiced in several European countries, is also investigated. Additionally, the study incorporates a comparative evaluation of general and marginal employment subsidies. Copyright 1989 by Scottish Economic Society.

The Revised Regional Development Grant Scheme: A Case Study in Cleveland County of a Marginal Employment Subsidy

WREN C. (1989) The revised Regional Development Grant scheme: a case study in Cleveland County of a marginal employment subsidy, Reg. Studies 23, 127–137. In 1984 substantial changes were made to the primary instrument of UK regional industrial policy, the Regional Development Grant, in order to improve the cost-effectiveness of this measure. Subsequently, in 1988, it was decided to abandon the scheme because of the deadweight spending associated with ‘automatic’ assistance schemes. In this paper, an examination is made of the revised RDG scheme taking the County of Cleveland as a case study. It is shown that the vast majority of payments under the revised scheme were in the form of a job grant, and that it operated in effect as a marginal employment subsidy. A survey of firms in Cleveland suggests that the revised scheme was an effective job creation measure, associated with relatively little deadweight spending, and this calls into question the decision to abandon the scheme in 1988. WREN C. (1989) Le p...

Do Marginal Employment Subsidies Increase Re‐Employment Probabilities? Preliminary Results on the Experiment of the Agenzia del Lavoro of Trento (Italy)

ABSTRACT: The purpose of this paper is to test whether a Marginal Employment Subsidy program (MES) is effective in reducing the length of unemployment spells. Our test is constructed in such a way as to isolate the direct effect of the MES from the business cycle effect (i.e. the variation in unemployment that would have normally occurred in the absence of the program). Specifically, we estimate a Markov chain duration model with time‐varying covariates and we test if eligibility for an MES increases the hazard rate of leaving unemployment. One of the time‐varying covariates is an index of macro‐economic performance that controls for the variation in the hazard rate due to business cycle fluctuations. The net effect of the MES offered by the Agenzia del Lavoro of Trento, Italy, is shown to be significantly positive: the Marginal Employment Subsidy program increases the re‐employment probability and reduces the expected duration of unemployment by twenty one months.

Unemployment and Vacancies in Britain

Unemployment Christopher Pissarides This paper uses data on unemployment flows and job vacancies to shed light on the phenomenal rise of unemployment in Britain, from under 3% in the 1960s to over 15% (male) unemployment in the 1980s. It finds that most of the rise is due to a fall in the demand for labour. A more expansionary fiscal policy and improved international competitiveness would have ameliorated this fall. Some of the fall, however, can also be attributed to supply pressure, which stopped wages from falling fast enough. Social security and a more relaxed attitude by the state in the provision of unemployment and supplementary benefits also contributed to the rise in unemployment, by making workers more choosey. The paper investigates whether it is possible for any given set of underlying factors to give rise to more than one equilibrium unemployment rate. If so, a temporary stimulus might release the economy from a low-level equilibrium. However the conditions necessary for this do not appear to hold in practice. Thus fiscal and monetary policy can permanently affect unemployment only if they can permanently alter aggregate demand. Microeconomic policy, like marginal employment subsidies, can, however, have a permanent effect on unemployment and the paper investigates whether there are any grounds for wishing to use such policy tools to alter the free-market equilibrium unemployment rate. There is evidence that the allocation of workers to jobs is done more efficiently at a fairly high level of overall labour demand. It follows that, unless job vacancies exceed unemployment, job creating policy measures will be beneficial.

Three Theorems on Inflation Taxes and Marginal Employment Subsidies

The paper studies the microeconomic theory of inflation taxes and marginal employment subsidies. It proves that under very weak assump- tions (i) an inflation tax will reduce the 1ong-run equilibrium wage or price and (ii) that a marginal employment subsidy will raise the long- run equilibrium employment level. The theorems, which show the policies' formal similarities, are illustrated with examples. One caveat is also raised: in a competitive industry (rather than a single firm), with free entry and exit, a marginal employment subsidy might reduce the total number of jobs. The paper also proves (iii) that in special circumstances a tax on inflation is exactly equivalent to a marginal employment subsidy.

THREE THEOREMS ON INFLATION TAXES AND MARGINAL EMPLOYMENT SUBSIDIES

Most Western nations are now experiencing high levels of unemployment. Traditional economic policies have apparently either helped to produce this or have not been able to eliminate the problem. Thus some economists have tried to suggest new ways in which governments might intervene in the labour market to raise the equilibrium level of employment. Two of the most widely known schemes are (i) taxes on inflation and (ii) marginal employment subsidies. This paper examines the microeconomic effects of these policies. One of the most fundamental points in the paper is that of the formal similarity between an inflation tax and a subsidy on marginal employment. Both work to raise the long run level of employment by changing the cost of adjusting from one short run equilibrium to another. An inflation tax imposes a fine on firms or workers when wage rates rise too fast; its aim is to reduce wages and so raise employment. A marginal employment subsidy is designed to reward firms or workers when employment rises quickly; its purpose, too, is to increase the level at which employment will be in equilibrium. Technically, then, these are both examples of the same sort of analytical problem. Each one requires that the relevant decision-maker bear in mind that his life-time utility depends on how quickly he alters his present behaviour. Each, in other words, is a problem in the calculus of variations, not one in simple calculus. There is now quite a large literature on the case for an inflation tax. Although it dates back at least twenty years, the idea has become topical because of the work of Richard Jackman and Richard Layard - most notably in Layard

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

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.

Marginal Employment Subsidies Again: A Brief Response to Whitley and Wilson

We are grateful to Whitley and Wilson both for investigating our proposed Marginal Employment Subsidy (MES) using a full-scale macro model and for correcting our arithmetic. With reference to the latter point first of all, luckily the revised numbers are not too different as a comparison of the first two columns of their Table i indicates, although they do demonstrate the superiority of computers to pencil and paper. Interestingly enough, under the revised figures the budget deficit cost per job of the MES is dramatically reduced, making it rather more desirable than we had originally supposed. This improvement is, however, more apparent than real since the budget-deficit effect is the difference between two very large and almost equal numbers (see the formula in LN). A small change in the assumption concerning, for example, the marginal rate of corporation tax makes a lot of difference. We are severely taken to task by Whitley and Wilson for asserting that the current state of the art in economics renders it impossible to analyse the policy effects in the context of a fully dynamic model. What we meant by this was not that we consider the existing UK macroeconomic models to be unsuitable but that there exists no theoretical dynamic macro model which commands wide enough support among economists to enable us to generate dynamic responses which would convince more than a small proportion of the profession. This absence of consensus does, in fact, spill over into the empirical models as well in the sense that with the key wage equation, for example, the difference in specification across the various large models is very large indeed and generates very different responses to certain types of policy, particularly in the short run. Concerning the conclusion of Whitley and Wilson that MES is only slightly superior to a non-marginal employment subsidy (NMES) (e.g. a cut in National Insurance) a reading of both papers makes it crystal clear that the important difference between us is in the impact of such a policy on price taking exporters. There are two points to be made here. First, export equations of the type which appear to have been used by Whitley and Wilson, which are specified in terms of prices but which omit costs, are obviously mis-specified with regard to the price taking sector since they cannot capture the essential supply behaviour of the price taking firm. Second, and perhaps more important, even an equation which in addition incorporates profits or better still relative labour costs (e.g. the Treasury model) cannot help us discriminate between a marginal versus average subsidy since the measures of profitability or labour costs which are used are average rather than marginal concepts. Since the average subsidy of an MES is the same as that for an NMES, use of an export equation specified [ 88I ]

The Macroeconomic Merits of a Marginal Employment Subsidy

Journal Article The Macroeconomic Merits of a Marginal Employment Subsidy Get access J. D. Whitley, J. D. Whitley University of Warwick Search for other works by this author on: Oxford Academic Google Scholar R. A. Wilson R. A. Wilson University of Warwick Search for other works by this author on: Oxford Academic Google Scholar The Economic Journal, Volume 93, Issue 372, 1 December 1983, Pages 862–880, https://doi.org/10.2307/2232751 Published: 01 December 1983

The Case for Marginal Employment Subsidies

The Case for Marginal Employment Subsidies