Resource title

Subsidizing extra jobs: promoting employment by taming the unions

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Resource description

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.

Resource author

Andreas Knabe, Ronnie Schöb

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/26175

Resource license

Adapt according to the presented license agreement and reference the original author.