Marginal Wage Subsidies: A Redistributive Instrument for Employment Creation

Abstract:     
Critics of marginal wage subsidies claim that their inter-firm displacement effects eliminate their employment and fiscal advantages over general wage subsidies. We develop a model in which we show that the contrary is correct. Inter-firm displacement with marginal subsidies forces down prices and raises output and employment more than under general subsidies. Moreover, we show that marginal subsidization is less expensive for the public budget than general subsidies and that it serves as a redistribution device by raising the labor share in the functional income distribution. A numerical illustration is used to support the theoretical results and to estimate their effects on unemployment in Germany.

Number of Pages in PDF File: 26

Keywords: marginal employment subsidies, double marginal subsidization, redistribution

JEL Classification: J38, J68, H25

working papers series