Capital Subsidies Versus Labour Subsidies: A Trade-Off between Capital and Employment?

29 Pages Posted: 7 Dec 2000

See all articles by Alberto Petrucci

Alberto Petrucci

LUISS Guido Carli - Department of Economics

Edmund S. Phelps

Center on Capitalism and Society, Columbia University

Date Written: 2000

Abstract

This paper examines the consequences of capital and labour subsidies for employment, capital formation and other macroeconomic variables within an OLG small open economy model of wealth accumulation. Two cases, the neoclassical-equilibrium one and the modern-equilibrium one, have been analysed. We discover that the employment effects of the subsidies studied differ significantly, while whether the subsidy hike is financed by an increase of payroll taxation or a decrease of employment subsidisation is immaterial for the qualitative effects on the macroeconomic system. In the neoclassical-equilibrium theory, a capital subsidy causes a temporary increase in hours worked which vanishes in the new long run, while an increase in labour subsidy has no aggregate effects on the macroeconomic equilibrium. The key finding of the modern-equilibrium case is the existence of a negative relationship between capital formation and employment. Capital subsidies boost investment and aggravate unemployment, while labour subsidies stimulate employment and may depress capital accumulation. unemployment, wealth accumulation

Keywords: capital subsidy, employment subsidy, structural

JEL Classification: E24, J32, J38

Suggested Citation

Petrucci, Alberto and Phelps, Edmund S., Capital Subsidies Versus Labour Subsidies: A Trade-Off between Capital and Employment? (2000). FEEM Working Paper No. 32.2000. Available at SSRN: https://ssrn.com/abstract=235080 or http://dx.doi.org/10.2139/ssrn.235080

Alberto Petrucci (Contact Author)

LUISS Guido Carli - Department of Economics ( email )

Viale Romania, 32
Rome, 00197
Italy
+39 06 8522 5737 (Phone)
+39 06 8522 5949 (Fax)

HOME PAGE: http://docenti.luiss.it/petrucci/

Edmund S. Phelps

Center on Capitalism and Society, Columbia University ( email )

420 W. 118th Street
New York, NY 10027
United States
212-854-2060 (Phone)
212-854-8059 (Fax)

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