Subsidizing Extra Jobs: Promoting Employment by Taming the Unions

Andreas Knabe and Ronnie Schöb ()
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Ronnie Schöb: School of Business & Economics, Free University Berlin
Authors registered in the RePEc Author Service: Ronnie Schoeb

No 7020, FEMM Working Papers from Otto-von-Guericke University Magdeburg, Faculty of Economics and Management

Abstract: 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.

Keywords: unemployment; marginal employment subsidies; general equilibrium (search for similar items in EconPapers)
JEL-codes: H25 J38 J68 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2007-10
New Economics Papers: this item is included in nep-lab
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Journal Article: Subsidizing extra jobs: promoting employment by taming the unions (2013)
Working Paper: Subsidizing Extra Jobs: Promoting Employment by Taming the Unions (2007)
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