In times of economic crisis, temporary wage subsidies can be used both to ensure a smooth adjustment of employment to output changes and to address wider social or equity concerns. Such subsidies can soften social exclusion by targeting workers who bear a particularly high burden from the crisis, and who are at risk of suffering continuing strong negative effects when the crisis has receded if no adequate measures are taken. In this context, the groups of workers commonly targeted include the long-term unemployed, the low-skilled and young workers(18) , all of whose chances of getting/staying employed reduce significantly when the jobs of more qualified workers are under threat.
Temporary wage subsidies aimed at encouraging hiring can strengthen employment in several ways:
At the same time, wage subsidies may also have downside effects if they are permanent, or not well targeted.
The above-mentioned effects are not easy to estimate, but the risk that they may exist has led to the view that wage subsidies should be primarily focused on the most vulnerable group of workers, and that they should be temporary. When targeted at the young, wage subsidies can ease the transition from school to work with important positive long-term side-effects. For older unemployed they may discourage them from seeking early retirement, while for the long–term unemployed they may offer better employment prospects.
(18) | Young people are of special interest because their unemployment rate has risen significantly and early labour market failure may be very costly. Indeed, several studies, e.g. Oreopoulus et al. (2008) and Skans (2004) show that unemployment during youth may affect later labour market performance in a very negative way. If skills are not put to use they will degenerate fast once one has left school, while the experience of being unemployed may reduce the incentive to search for work, all leading to reduced employment prospects. Moreover, if seniority-based rules apply, employers will cut their workforce primarily by dismissing those who have been employed for a shorter period. |
(19) | E.g. Jaenichen and Gesine (2007), Gesine (2008), Bernhard et al. (2008) |
(20) | I.e. the hiring from the target group that would also have occurred in the absence of the measure. |
(21) | See Marx (2005). |
(22) | I.e. the replacement of jobs for nontargeted groups because relative wage costs have changed. |
(23) | See for instance Skans (2004) and Scarpetta et al. (2010). |
(24) | In addition, the wage gap will also decrease as the result of tax increases on the medium- and high-skilled wages necessary to finance the wage subsidies. |
(25) | See Oskamp and Snower (2008). |
(26) | See Lee (2005). |