Tuesday, August 4, 2009

The impact of wage subsidies

Several European countries, including Germany, have wage subsidies to encourage employer to hire unemployed workers. While there is no doubt that, at the margin, this can reduce unemployment, the real question is whether those hired with a subsidy also stay employed after the subsidy expires, and have longer employment spells than those hired without a subsidy.

Gesine Stephan looks at the German case and finds the subsidy works in the sense that after 3.5 years the cumulated wages are higher for the subsidized workers. But does it work well enough to justify the cost of the subsidy. On average, the subsidy amounts to €2500 to €3000. This results in cumulative wages increased by €2200 to €5000. Is this worthwhile? First, this generates more tax and social security income, second, less needs to be spent on unemployment insurance. In a carefully worded appendix, Stephan argues it looks like wages subsidies are fiscally beneficial at least to a first approximation. While this result is subject to all sorts of qualification, I am glad that, for once, a cost-benefit analysis of a policy is performed, instead of only showing that something is statistically significant.

No comments: