What Is a Wage Subsidy Definition

Huttunen K, Pirttilä J, Uusitalo R: The effect of low-wage subsidies on employment. J Public Econ 2010, 97:49–60 dx.doi.org/10.1016/j.jpubeco.2012.09.007 Most evaluations of wage subsidy programs focus on high-income countries and show large differences in results. Neumark (2013) recently summarized the literature and concluded that, in general, targeted hiring loans were likely to be ineffective (see also Bartik 2001; Dickert-Conlin and Holtz-Eakin, 2000; Katz 1998)1. Recent assessments for Jordan and South Africa also show mixed results. In Jordan, a pilot programme gave beneficiaries a six-month minimum wage voucher. The evaluation showed that this voucher increased employment by 40 percentage points in the short term, even though most jobs were informal. Four months after the expiry of the voucher, however, the effects dissolved – except outside the capital (see Groh et al. 2012). This seems to be partly explained by labour regulations that require companies to award contracts of indefinite duration after a certain period of time. 7 Minimum wage regulation may also prevent wage cuts, but the solution would not be a wage subsidy, but a change in regulations.

Income documentation for the calculation of the subsidy should be simple – if the subsidies apply only to formal salaried employment. Almost all countries, even in developing countries, have some form of income tax or income-based social security contribution. The subsidy requested must correspond to the income declared in this system. For example, the verification of revenues for support purposes may be based on the existing monitoring system. In the simplest case, when the subsidy is simply a reduction in that tax or contribution, it automatically falls under that system. This means, of course, that monitoring compliance with wage subsidies is only as good as monitoring the existing system. When designing a wage subsidy, policymakers should closely examine existing oversight safeguards and, if necessary, strengthen them. We have seen that in a standard system of taxes and benefits, when a sum is paid to all those who cannot find work, it is the people whose marginal productivity (which determines their wage in a competitive market) is lower than what you would prefer to be unemployed. The number of people affected will tend to increase due to the introduction of automation.

A recent study concluded that “automation increases inequality in all scenarios because it tends to displace the lowest-paid workers.” [13] Goos and Konings (2007) also used company data to assess wage subsidies to workers in Belgium and found significant impacts on employment. A careful analysis of Finland`s wage cost subsidy for older and low-paid workers by Huttunen et al. (2010) yielded mixed results: the subsidy did not have a significant impact on employment or the probability of leaving a job, but led to a 2% increase in working hours for workers in the industrial sector (but not in the service sector) by reducing the probability of the fact that a part-time employee becomes full-time has been increased by 7%. At the same time, the subsidy reduced the hourly wages of industrial workers by 2%, offsetting the effect of increased hours on earnings. Proponents of the wage subsidy argue that it would allow the lowest-paid workers to receive a living net wage, even if their economic value to their employers was below the socially acceptable minimum, and that their after-tax wages could exceed unemployment benefits by a margin sufficient to be incentivized to take up work. The subsidy would thus avoid the welfare trap, but could have less impact on a minimum wage imposed by collective bargaining, as unions could respond to the measure by increasing their demands. (Pigou obviously hoped that this would not happen, as he hypothesized that “the wage set by the employees” would be reduced “from w to (w – s)”. [1]: 168 ) This wage would probably be close to the individual`s reserve salary and would therefore reflect his or her human capital. Breaks would then implicitly define the number of jobs j that are “feasible” for a particular person, i.e. jobs where the subsidy would be sufficient to encourage employers to participate when assessing the person`s learning potential. Kramarz F, Philippon T: The impact of different tax subsidies on wages on minimum wage employment.

J Public Econ 2001, 82: 115–146. 10.1016/S0047-2727(00)00137-7 Some of the key findings come from the United States and provide mixed evidence of the effectiveness of wage subsidies as tools to promote job creation. The U.S. has adopted four wage subsidy programs: the 1970s New Jobs Tax Credit, the Employment Opportunities Tax Credit (formerly the Targeted Jobs Tax Credit), the Earned Income Tax Credit, and On-the-Job Training Under the Job Training Partnership Act. As summarized by Neumark (2013), some of the studies evaluating these programs suggest that hiring loans are ineffective (Hamersma, 2008; Bartik, 2001; Dickert-Conlin and Holtz-Eakin, 2000; Katz, 1998). This seems to be the case, at least for programmes for the disadvantaged. There is far less evidence of broad or non-categorical hiring credits that explicitly seek to promote job creation as a whole. Recently, Neumark and Grijalva (2013) examine a wide range of government hiring loans and find that these broader programs effectively helped create jobs during the Great Recession. Wage subsidies could be considered if some people, particularly those with little or no work experience, may not have access to jobs that can use and develop their skills.3 .

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