Unemployment Vouchers Versus Low-Wage Subsidies

46 Pages Posted: 21 Aug 2002

See all articles by J. Michael Orszag

J. Michael Orszag

Willis Towers Watson - Reigate (Surrey Office); Institute for the Study of Labor (IZA)

Dennis J. Snower

University of Kiel - Institute for World Economics (IfW); Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 2002

Abstract

The paper examines the relative effectiveness of two policy proposals in reducing unemployment and working poverty: unemployment vouchers and low-wage subsidies. The unemployment vouchers are targeted exclusively at the unemployed (especially the longterm unemployed) and are provided only for a limited period of time. The low-wage subsidies, on the other hand, are granted to all low-wage earners regardless of their employment history and are of limitless duration. Our analysis indicates that the relative effectiveness of the two policies depends on workers' prospective wage growth. The more upwardly mobile workers are (i.e. the more their wages rise with employment duration), the more effective will unemployment vouchers be relative to low-wage subsidies. Conversely, the greater the danger that workers come to be trapped in dead-end jobs with flat wage profiles, the more effective will low-wage subsidies be relative to unemployment vouchers.

Keywords: Unemployment, Poverty, Wages, Employment, Vouchers, Subsidies, Inequality

JEL Classification: J23, J32, J38, J64, J65, J68

Suggested Citation

Orszag, J. Michael and Snower, Dennis J., Unemployment Vouchers Versus Low-Wage Subsidies (July 2002). Available at SSRN: https://ssrn.com/abstract=323590 or http://dx.doi.org/10.2139/ssrn.323590

J. Michael Orszag

Willis Towers Watson - Reigate (Surrey Office) ( email )

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Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Dennis J. Snower (Contact Author)

University of Kiel - Institute for World Economics (IfW) ( email )

Duesternbrooker Weg 120
D-24118 Kiel
Germany
+49+431-8814-235 (Phone)

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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