Marginal Employment Subsidization: A New Concept and a Reappraisal

21 Pages Posted: 20 Oct 2006

See all articles by Andreas Knabe

Andreas Knabe

Otto-von-Guericke-Universität Magdeburg - Institute of Economics and Business Administration; CESifo (Center for Economic Studies and Ifo Institute)

Ronnie Schöb

Freie Universitaet Berlin; CESifo (Center for Economic Studies and Ifo Institute)

Joachim Weimann

Otto-von-Guericke-Universität Magdeburg - Institute of Economics and Business Administration; CESifo (Center for Economic Studies and Ifo Institute)

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Abstract

In this paper, we attempt to renew the interest in marginal employment subsidies. Such subsidies are paid only for a firm's additional employment exceeding some reference level and create larger employment stimuli at lower fiscal costs than general wage subsidies for all workers. If the hiring of a new employee also entails subsidizing an incumbent worker (double marginal subsidization), the replacement of regular paid workers by outsourcing employment to newly established firms - a standard critique of marginal employment subsidies - can be avoided. This additional subsidy reduces the incentive to crowd out regular employment and results in even larger employment effects. Applying the subsidy scheme to the low-skill labor market in Germany, we show that employment can be substantially increased without imposing additional fiscal burden.

Suggested Citation

Knabe, Andreas and Schöb, Ronnie and Weimann, Joachim, Marginal Employment Subsidization: A New Concept and a Reappraisal. Kyklos, Vol. 59, No. 4, pp. 557-577, November 2006. Available at SSRN: https://ssrn.com/abstract=938841 or http://dx.doi.org/10.1111/j.1467-6435.2006.00349.x

Andreas Knabe

Otto-von-Guericke-Universität Magdeburg - Institute of Economics and Business Administration ( email )

Universitaetsplatz 2
Magdeburg, 39016
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Ronnie Schöb (Contact Author)

Freie Universitaet Berlin ( email )

Boltzmannstraße 20
Berlin, Berlin 14195
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Joachim Weimann

Otto-von-Guericke-Universität Magdeburg - Institute of Economics and Business Administration ( email )

Universitaetsplatz 2
Magdeburg, 39016
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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