 Why do governments subsidise investment and not employment?Clemens Fuest and Bernd Huber Munich Reprints in Economics from University of Munich, Department of Economics Abstract: The governments of nearly all industrialised countries use subsidies to support the economic development of specific sectors or regions with high rates of unemployment. Conventional economic wisdom would suggest that the most efficient way to support these regions or sectors is to pay employment subsidies. We present evidence showing that capital subsidies are empirically much more important than employment subsidies. We then develop a simple model with unemployment to explain this phenomenon. In our model, unemployment arises due to bargaining between unions and heterogenous firms that differ with respect to their productivity. Union bargaining power raises wage costs and leads to a socially inefficient collapse of low productivity firms and a corresponding job loss. Union-firm bargaining also gives rise to underinvestment. It turns out that an investment subsidy dominates an employment subsidy in terms of welfare if there is bargaining over wages and employment on the firm level. If bargaining is over wages only, results are ambiguous but capital subsidies may still be preferable. Date: 2000 Published in Journal of Public Economics 1-2 78(2000): pp. 171-192 There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenar:20295 Access Statistics for this paper More papers in Munich Reprints in Economics from University of Munich, Department of Economics Ludwigstr. 28, 80539 Munich, Germany. Contact information at EDIRC. |
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