Wage Subsidies and European Unemployment: Theories and Evidence

Abstract

Wage subsidies are an increasingly popular policy instrument. This survey provides a critical assessment of wage subsidies in the context of contemporary labour market problems in the EU. A selective review of the experience of wage subsidies in the OECD is provided and the development of theory since Kaldor is critically assessed. The paper expounds the merits of Snower's Benefit Transfer Programme, a marginal job-creating subsidy targeted on the long-term unemployed. It suggests modifications to his proposal to distinguish between the tradable and non-tradable sectors and to respond to the growth of part-time employment and to the threat of increasing wage inequality.