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Wage subsidies for the long term unemployed: a search theoretic analysis

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  • Richardson, J.
Abstract
The persistence of mass unemployment in many OECD countries in the 1980s and 1990s has led to renewed interest in active labour market policies. We examine one such policy, a wage subsidy for employers hiring the long-term unemployed, using a search-theoretic framework. We assume that long-term unemployment leads to a loss of human capital, and that a subsidy can offset the consequent training costs faced by employers hiring the long-term unemployed. We argue that unemployment would be unambiguously reduced by such a policy. Furthermore, the often-made criticism of wage subsidies that they mainly lead to substitution, merely churning the unemployed, is misplaced. There are positive externalities to substitution that lead firms to open more vacancies, many of which in turn will be filled by the short-term unemployed.

Suggested Citation

  • Richardson, J., 1997. "Wage subsidies for the long term unemployed: a search theoretic analysis," LSE Research Online Documents on Economics 20337, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:20337
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    References listed on IDEAS

    as
    1. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    2. Calmfors, Lars & Skedinger, Per, 1995. "Does Active Labour-Market Policy Increase Employment? Theoretical Considerations and Some Empirical Evidence from Sweden," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 11(1), pages 91-109, Spring.
    3. repec:hhs:iuiwop:429 is not listed on IDEAS
    4. Calmfors, Lars & Forslund, Anders, 1991. "Real-Wage Determination and Labour Market Policies: The Swedish Experience," Economic Journal, Royal Economic Society, vol. 101(408), pages 1130-1148, September.
    5. Snower, Dennis J, 1994. "Converting Unemployment Benefits into Employment Subsidies," American Economic Review, American Economic Association, vol. 84(2), pages 65-70, May.
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    8. William R. Allen, 1977. "Irving Fisher, F. D. R., and the Great Depression," History of Political Economy, Duke University Press, vol. 9(4), pages 560-587, Winter.
    9. J Richardson, 1997. "Can Active Labour Market Policy Work? Some Theoretical Considerations," CEP Discussion Papers dp0331, Centre for Economic Performance, LSE.
    10. Calmfors, Lars & Lang, Harald, 1995. "Macroeconomic Effects of Active Labour Market Programmes in a Union Wage-Setting Model," Economic Journal, Royal Economic Society, vol. 105(430), pages 601-619, May.
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    Cited by:

    1. Richardson, James, 1998. "Do wage subsidies enhance employability? Evidence from Australian youth," LSE Research Online Documents on Economics 20280, London School of Economics and Political Science, LSE Library.
    2. repec:eee:labchp:v:3:y:1999:i:pc:p:3085-3139 is not listed on IDEAS
    3. David Robalino & Arup Banerji, 2009. "Addressing the Employment Effects of the Financial Crisis : The Role of Wage Subsidies and Reduced Work Schedules," World Bank Publications - Reports 11717, The World Bank Group.
    4. J Richardson, 1998. "Do wage subsidies Enhance Employability? Evidence from Australian Youth," CEP Discussion Papers dp0387, Centre for Economic Performance, LSE.
    5. Brian Bell & Richard Blundell & John Reenen, 1999. "Getting the Unemployed Back to Work: The Role of Targeted Wage Subsidies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(3), pages 339-360, August.

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    More about this item

    JEL classification:

    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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