Subsidies as instruments of labour market policy

Abstract

"The paper studies the impact of labour market policy subsidies on the structure and level of unemployment. The available instruments are, on the one hand, subsidies oriented towards cutting the labour supply by reducing working life and, on the other hand, subsidies aimed at relieving the unemployed by helping them acquire qualifications for reentry into working life. A solution to the structure problem on the labour market would require that workers who have been sent into early retirement through the subsidies be replaced especially by giving employment to structurally disadvantaged groups. If older jobholders could be motivated by subsidies to leave their jobs in favor of young unemployed persons, this could lead to a reduction of the social burdens of unemployment at different costs for leaving the labour market. The existence of external earnings is a recognized reason for subsidies. However, the economic accuracy of such subsidies is low in view of the fact that the individual costs of leaving the market cannot be quantified. In addition, there is a danger that the structural problems on the labour market will merely be shifted to other age groups. Training measures can contribute to the reduction of structural unemployment, if the productivity of the long-term unemployed rises to such an extent that employing them is profitable for the employer. According to the theory of human capital by Gary S. Becker, employers should carry the costs for the general training themselves. This theory is modified such that the social transfers of the state, for example, unemployment benefits or social assistance, are integrated into the model. It is then shown that subsidies are also justified in efficiently carrying out qualification measures, because the incentive for employers to take on training costs, with an eye to future earnings which will satisfy market conditions, is reduced by the availability of social transfers. The total effects can be measured by the impact of the subsidies either on the level of unemployment or on the level of employment. It is argued that the traditional unemployment relief calculations are insufficient, because they neglect the cost effects of subsidies. The analysis isexpanded by long-term forces which result from the kind of financing of the labour market policy subsidies. If labour maket policy subsidies are financed by social security, incidental labour costs rise and job reductions are concentrated particularly within marginal jobs. However, if labour market subsidies are financed by the Federal budget, highly profitable firms become more strongly burdened; the competitiveness of the Federal Republic of Germany within the economically important innovative segments of the market will then be particularly endangered. In this paper labour market policy subsidies are considered as investments in the human capital of the unemployed, which must then become 'profitable'. An efficient labour market policy should therefore support those measures in which present expenditures will be compensated by future savings in the social security system. Owing to the resulting reduction in the incidental wage costs, the income policies will result in more scope for the employed as well as for the employment policies of the unemployed. Subsidies for reducing the labour supply cannot fulfill this criterion of efficiency, because they lead to a permanent additional burden, without any hope of future gains in productivity. Training measures have the great advantage that further support benefits cease after the worker is reintegrated into the primary labour market. This investment policy approach will have consequences for the selection of participants aml the content of the programmes." (Author's abstract, IAB-Doku) ((en))

Cite article

Schellhaaß, H. & Kelp, L. (1995): Subventionen als Steuerungsinstrumente des Arbeitsmarktes. In: Mitteilungen aus der Arbeitsmarkt- und Berufsforschung, Vol. 28, No. 3, p. 399-411.