The above analysis considers a subsidy paid directly to workers irrespective of their age. In this section the assumption is that payments are restricted to workers under 25, while the individual cost of the subsidy is maintained at one percent of average labour cost. The situation will be plotted against the initial simulation results where subsidy was provided to every worker. We restrict the analysis to the case of Germany as the mechanisms are the same in all countries.
The budgetary cost of the subsidy, if the measure is restricted to the young amounts to some 7% of the cost of the unrestricted subsidy. The proportions in terms of economic expansion and employment gains are considerably higher (see Chart 9). In other words, relative to the expenditure involved, the effectiveness of a subsidy targeted at young workers appears to be higher than that of a subsidy given to every worker. This is explained by the wage structure across age groups. The wage levels of young workers are lower than the average for all workers. Hence, a given amount of subsidy provides a relatively stronger incentive to work and will encourage more younger than older workers to search for a job and/or to remain in employment.
Moreover, even if only the subsidy’s employment impact among young workers is considered, the employment gain for the young is more significant if the measure is restricted to them than without restriction (see Chart 10).
This result is achieved because workers of different age groups supply labour in a competitive environment, which means that there is a substitution effect across age groups. If employment of the young becomes relatively more attractive to firms because their wages are lower as a result of the subsidy, then demand for the young will increase relative to that for other age groups (in the restricted scenario the substitution would be expected to cause a slight decline in employment levels in other age groups).
6.2.4. Tentative conclusions from the micro-model simulationOverall, for the countries considered, wage subsidies would impact positively on employment levels. Over the period during which the measure is applied, it leads to downward pressure on wages paid by employers and increases demand for workers. On the supply side, the in-work subsidy improves workers’ inside position which, in turn, triggers increased participation. As a result, employment levels rise and unemployment is reduced. Given the boost to employment, investment is increased as capital intensity will temporarily drop below its steady-state equilibrium.
Temporarily supporting employment could therefore be seen an appropriate means to respond to the crisis. However, it has to be recognised that it is a costly labour market policy instrument in budget terms. Over three years of an active policy, if support were granted on an unrestricted basis to every worker, the annual cost of the measure could amount to 0.5% to 0.6% of GDP per year(46) for the countries considered.
This leads to the conclusion that:
(46) | I.e. change of net transfers to households, as we have assumed lump-sum levies put on households to be the source of finance. |
(47) | The effect of skill acquisition is captured by the model. Simulations of a permanent in-work wage subsidy across all age groups resulted in long-term overall productivity gains (productivity losses were only noted for the low-skilled workers). |