Allocating Subsidies for Private Investments to Maximize Jobs Impacts

David Robalino, Jose Manuel Romero and Ian Walker

No 32113476, Jobs Group Papers, Notes, and Guides from The World Bank

Abstract: This paper develops a general framework to allocate subsidies to private investments in the presence of jobs-linked externalities (JLEs). JLEs emerge when wages exceed the opportunity cost of labor (labor externalities), or when there are social gains from creating better jobs for some classes of worker, such as women or youth (social externalities). Like all externalities, JLEs create a gap between private and social rates of return. Investments can be socially profitable (once the corresponding JLEs are internalized) but the private returns may be too low for the firm to go ahead. JLEs help to explain why many developing countries see insufficient investment in projects that would reallocate labor towards better jobs. The concept of JLEs is well established in economic literature, but there is a need for better operational approaches to address them. Like other externalities, JLEs can be corrected using a variety of possible subsidies (such as: grants, subsidized infrastructure, credit, training, technical assistance and tax exemptions). But doing this efficiently and at scale this requires mechanisms to (a) estimate the value of the externality and (b) discover the amount of subsidy needed to trigger the private investment. This paper shows that the optimal way to allocate subsidies to offset JLEs is through a competitive bidding process which selects projects based on the estimated amount of JLEs per dollar of subsidy. The bidding process provides an incentive to investors to reveal the subsidy needed for a project to become privately viable. The authors show that the proposed approach maximizes the jobs impacts of a given amount of fiscal resources that has been allotted to support better jobs outcomes.

Keywords: social rate of return; small and medium size enterprise; share of labor in production; number of jobs; correction of market failure; Economic Rate of Retum; active labor market program; female labor force participation; business plan competition; net financial benefit; labor productivity; capital per worker; social externalities; level of employment; level of support; competitive bidding process; selection criterion; combinations of labor; total factor productivity; low labor productivity; elasticity of substitution; job creation potential; social protection system; cost of labor; job search assistance; labor market intervention; source capital; labor market reform; demand for labor; rates of return; labor market outcome; household survey data; investment in capital; interest rate subsidy; exchange rate policy; Exchange rate policies; dangerous working condition; share of profit; labor force growth; impacts on business; capital labor ratio; monte carlo simulation; number of workers; Youth in Conflict; partial risk guarantee; form of investment; share of capital; matching grant program; point of entry; SME support program; supply of labor; share of investment; privileges and immunity; social preference function; high skilled labor; unemployment benefit system; entrepreneurship support programs; domestic capital formation; private investment; financial rate; public policy; Learning and Innovation Credit; production function; fiscal resource; average cost; demand-side interventions; employment rate; opportunity cost; social value; formal sector; private investor; recent studies; private rate; market wage; job impact; labor supply; simple model; financial return; investment subsidies; young woman; expert panel; public subsidy; new job; empirical estimation; optimal allocation; firm size; young men; financial cost; weighted average; output growth; human capital; social return; labor code; minimum wage; low-skilled job; private capital; explicit subsidy; total output; firm growth; social gains; investment rate; average productivity; baseline data; wage subsidy; Wage Subsidies; market potential; outcome indicator; financial viability; environmental externality; constant term; tariff policy; increased investment; increased demand; capital input; static equilibrium; factor price; Political Economy; empirical evidence; income growth; market force; rural labor; land market; taxation system; Capital Investments; job growth; Demographic Transition; tax break; infrastructure provision; value chain; factor endowment; market demand; technological change; investment growth; capital-labor ratio; capital deepening; Macroeconomic Policy; earnings gain; random variable; Exchange Rates; government subsidy; unemployed youth; employment status; fixed budget; production technology; foregone income; net private; return increase; productivity level; social opportunities; paying job; start-up capital; capital intensity; profit to revenue; horizontal axis; paper issue; eligibility criterion; labor-intensive technology; Cash flow; managerial skill; large population; low capital; machine learning; labor-intensive production; standard error; section show; standard deviation; investment cost; virtual business; profit maximization; private information; large enterprise; low wage; labor turnover; auction mechanism; enterprise survey; aggregate employment; future research; allocation criterion; alternative subsidy; business establishment; labor demand; fiscal subsidy; fiscal envelope; public program; productivity gain; project selection; public support; knowledge spillover; risk assessment; business survival; baseline survey; predictive power; social capital; individual income; small grants; business performance; literature studies; credit market; managerial ability; financing sustainability; financing source; business management; targeted outcomes; result indicator; sales growth; negative externality; property crime; carbon emission; renewable resource (search for similar items in EconPapers)
Pages: 27
Date: 2020-06-01
New Economics Papers: this item is included in nep-ppm
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