Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26175
Authors: 
Knabe, Andreas
Schöb, Ronnie
Year of Publication: 
2007
Series/Report no.: 
CESifo working paper 2130
Abstract: 
We study the subsidization of extra jobs in a general equilibrium framework. While the previous literature focuses on symmetric marginal employment subsidies where firms are rewarded when they increase employment but punished when they reduce their workforce, we consider an asymmetric scheme that only rewards employment expansion. This changes the incidence substantially. In the asymmetric case without punishment, it becomes less costly for firms to lay off a substantial fraction of their workforce when trade unions raise wages. This tames the unions, which causes wage moderation and raises aggregate employment and welfare. For moderate subsidy rates, all unions prefer to restrain their wage claims. At sufficiently high subsidy rates, labor market conditions improve so much that some unions enforce higher wages and let their firms shrink. This displacement of firms might have a negative impact on employment and welfare.
Subjects: 
marginal employment subsidies
unemployment
general equilibrium
JEL: 
H25
J38
J68
Document Type: 
Working Paper

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