CHAIR OF

PUBLIC ECONOMICS

Wage subsidies can help to create employment and reduce unemployment by lowering labor costs and increasing labor demand. A problem of wage subsidies is, however, that they might give rise to higher wage claims by labor unions. The resulting increase in labor costs would reduce the initially positive employment effect of the wage subsidies. In a recent research article, Andreas Knabe and Ronnie Schöb (FU Berlin) show that the shifting of the subsidy into higher wages can be reduced if the subsidy is granted only for marginal, i.e. additional, employment. With this restriction, the employment-creation effect of wage subsidies can be maintained.

The publication can be found here.