Labor Markets Core Course 2013: Designing Wage Subsidies: When and How?


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Labor Markets Core Course 2013: Designing Wage Subsidies: When and How?

  1. 1. David A. RobalinoDesigning Wage Subsidies: when andhow?
  2. 2. Any transfer to reduce the cost of labor toemployers or increase the earnings ofemployees...... they come in many "flavors":Employer vs employeeTransfers vs tax-creditsDifferent formulas, levels, and durationsFor current or new workersWith or without conditionalities
  3. 3. Topics• Rationale• Impact• Design
  4. 4. Rationale
  5. 5. Three different objectives• Protect or create jobs• Increase participation rates• Improve the employability of workers
  6. 6. Protect or create jobsHigh incomeMiddle incomePercent of countries implementing wage subsidies during the crisis0 20 40 60 80
  7. 7. EmploymentWagesDSEW
  8. 8. EmploymentWagesDSEWSUnemployment
  9. 9. EmploymentWagesDSEWSW
  10. 10. EmploymentWagesDSEWSWCOST
  11. 11. EmploymentWagesDSEWSWCOSTTaxes
  12. 12. Problems• Sustainability• Substitution effects• Death-weight losses
  13. 13. But what about in timesof crisis?• Its costly to fire and hire workers...• ... if the problem is a temporary lack ofdemand why not help employers keepworkers?
  14. 14. But what about in timesof crisis?• It s costly to fire and hire workers...• ... if it is a temporary lack of demand why not helpemployers keep workers?• It might me difficult to pick the right employers• If the problem is demand, why not to sustain it throughfiscal policy ?• ... or, keep credit going and let the employers find financingto keep their workers employed while things get better?
  15. 15. Increase participation• To help people "graduate" from welfareUSA New Jobs Tax Credit• To increase participation rates of targetgroups (women, youth):India ENREGA
  16. 16. EmploymentWagesDSEW
  17. 17. EmploymentWagesDSEWWS
  18. 18. EmploymentWagesDSEWWSUnemployment
  19. 19. EmploymentWagesDSEWWSCOST
  20. 20. Can we justify these costs basedon expected social gains?• The subsidy reduces dependence fromwelfare -- better pay people who are working• It is important to have more femalesparticipate in the labor market
  21. 21. Can we justify these costs basedon expected social gains?• The subsidy can reduce dependence from welfare -- betterpay people who are working• It is important to have more females participate in the labormarket• There is a question of wether welfare benefits are too high;subsidies cannot be implemented forever• A negative income tax, though, can indeed help protect lowincome workers (but then the issue is not job creation)...• Subsidizing work among inactive women can reduceemployment among active women (unless public)
  22. 22. Improving employabilityProductivityTimet1Minimum cost of labor
  23. 23. Improving employabilityProductivityTimet1Minimum cost of labortN
  24. 24. Improving employabilityProductivityTimet1Minimum cost of labortNCOST
  25. 25. Improving employabilityProductivityTimet1Minimum cost of labortNCOST
  26. 26. But maybe subsidiesthen do less...Self-employmentFormalInformalUnemploymentUnemployment of eligibleChanges in Shares if WSs are eliminated-0.025 0 0.025 0.05 0.075 0.1TUNISIA wagesubsidy for youth
  27. 27. ... than reducing theminimum wage?TUNISIA minimumwage for youthSelf-employmentFormalInformalUnemploymentUnemployment of eligibleChanges in Shares if MG is eliminated-0.06 -0.045 -0.03 -0.015 0 0.015 0.03 0.045 0.06
  28. 28. What if minimum laborcosts are not an issue?ProductivityTimet1tNW1W2
  29. 29. Employers are unlikely tohire inexperiences workers• Even if wages can be lower, there are risksinvolved (benefits might come or not in thefuture)• There might also be additional costs of training(with the risk of poaching)• The wage at which it can be a "good investment"to hire -- compensating from delayed, riskybenefits, and additional costs -- can be too low
  30. 30. Impacts
  31. 31. The evidence• The Tax-wedge• Studies in OECD• Studies in MICs
  32. 32. Tax-wedge
  33. 33. Tax-wedgeThe difference between the total cost of labor and take-home payTax Wedge = W . (1+taxE) - W. (1-taxW)W: wagetaxE: taxes paid by employer (social security contributions)taxW: taxes paid by workers
  34. 34. Reducing the tax wedgeincreases formal employmentEmploymentlevel90100110120Tax wedge0.1 0.2 0.3
  35. 35. OECDProgramTargetgroupImpact AuthorsTargeted Jobs TaxCredit (TJTC) -USA23-243.4pp increase in employment or7.7%DW: 40-52%Cost USD 1,500Katz (1998)TJTC 23-24DW: 75%Cost: USD 5,000-11,000Bishop (1999)Earned Income TaxCredit (EITC) - USAWelfarerecipients3.4% increase in earning & 5.6%increase in emplomentHotz (2006)Jobs TrainingPartnership Act -USALowincomeNo effect on youth or adult men15% increase in earnings amongwomenOrr et al. (1996)
  36. 36. ...ProgramTargetgroupImpact AuthorsWorking Tax Credit- UKLowincome3.5-4% in labor supply amonglone parentsBlundell (2006)New Deal for YoungPeople - UK18-24 -20% in unemployment Dorsett (2006)Progressive payroll- FranceLowincomeNo impactKramarz andPhilippon(2001)
  37. 37. Rule of thumbLabor supply elasticity = 0.75Labor demand elasticity = -0.5A 10% wage subsidy would increase employmentby 3% and wages by 4%
  38. 38. MICsProgramTargetgroupImpact AuthorsPro-empleo -ArgentinaWelfarerecipients8-9pp in wage employmentGalasso et al.,(2006)Wage Voucher forWomen - JordanWomen40% increase in formalemployment -- effect dissipatesafter 4 monthsGroh (2012)Wage Voucher forYouth - South AfricaYouth7pp increase in wageemployment -- persisted after 2yearsLevinsohn(2013)Implementation challenges
  39. 39. Main observations• In general, positive impacts on employment• Much depends on the targeted group and design• But most evaluations do not look at substitution effectsand DW losses• Subsidies cannot sustain employment creation...• Might not be the best alternative to protect or creat jobsduring a crisis...• ... but can be a policy instrument to improveemployability (DW matter less)
  40. 40. Design
  42. 42. Policy choicesTARGET POPULATIONFocus on the objective of improvingemployabilityTarget first time job seekers and the long-term unemployedIf there is a need for direct temporary jobcreation, use public works and services...
  43. 43. Policy choicesPAYMENT TO EMPLOYERS OREMPLOYEESIf the objective is to promoteemployability through OJT youneed to reduce the cost oflaborThis implies that the subsidygoes to the employerBut it should follow the work(use vouchers)
  44. 44. Policy choicesCALCULATION OF THESUBSIDYWhich formula ?Flat amount (e.g., internships)% of the min cost of labor% varies with individualcharacteristicsPercentage of negotiatedwages up to a maximumWhat is the value ?What is the duration ?
  45. 45. Formula depends on problem /target groupProductivity/wagesSkillsMinimum cost of labor
  46. 46. Formula depends on problem /target groupProductivity/wagesSkillsMinimum cost of laborPercentage of min costof labor could workPercentage ofnegotiated wages
  47. 47. Formula depends on problem /target groupProductivity/wagesSkillsMinimum cost of laborPercentage of min costof labor could workPercentage ofnegotiated wages• But no clear rule for the LEVEL• For the DURATION, nolearning if less than 9 months
  48. 48. Policy choicesCONDITIONALITIESIt is important to have conditionalitieson employers and employeesEMPLOYERS:So that job/internship matchesexpectationsTo control substitution effectsPromote more learning and risk-taking(condition the duration)EMPLOYEES:To participate in other ALMPs
  49. 49. Take aways...• Programs can have a role toplay in improving employability• A difficulty is finding the rightlevel and duration...• ... and controlling substitutioneffects• Because of the uncertainty onimpacts it is important to pilot& evaluate between full scaleimplementation