economics

Explain and illustrate graphically the comparative statics of hiring credits (i.e. subsidies for employers). Please consider at least the following variables/factors: employment level, initial wage, per worker earnings/wage including subsidy, wage cost per worker including subsidy).

I will expect a 2-3 pages answer including a brief description of the market that is addressed, a diagramm that covers the before-and-after analysis on that market including a short explaination as well as an outlook on labor markets during cycles.

Subsidy

-1. Economic benefit (such as a tax allowance or duty rebate) or financial aid (such as a cash grant or soft loan) provided by a government to (1) support a desirable activity (such as exports), (2) keep prices of staples low, (3) maintain the income of the producers of critical or strategic products, (4) maintain employment levels, or (5) induce investment to reduce unemployment. The basic characteristic of all subsidies is to reduce the market price of an item below its cost of production. Also called subvention.

Subsidies:

Aim to change relative prices
Given to the producer
Used to help re-distribute income
Used to help firms compete
Numerous examples – state benefits, free school meals, working tax credits, agriculture, transport, regional development, housing, employment, education

Wage or employment subsidies have been used in both developed and developing countries to raise employment levels. In countries facing labor supply constraints due to reservation wages, the subsidy is offered to employees. In a developing country context, where labor market failure is characterized by unemployment, a firm-side subsidy that promotes demand for labor is more appropriate. Furthermore, when poverty is closely associated with unemployment, a wage subsidy scheme may be effective as an antipoverty strategy.

How do subsidies affect curves? Take a look at the graph.

Subsidy on Sellers

– In the above graph, the government is subsidizing employers on the supply-side.

when there is a supply-side subsidy, the supply curve shifts to the right.

The demand curve remains constant, but the quantity demanded will increase. Employers are willing to offer lower prices since they are receiving a subsidy from the government. The new equilibrium point is at a higher quantity and a lower price.

Początek formularza

Wage subsidies - are payments made to eligible employers to help cover the costs of paying wages in the first few months of employment. They are meant to help create job opportunities for people who have difficulty finding employment.

Wage subsidies also aim to help people with disability to obtain employment and acquire valuable skills and experience.

Who can receive wage subsidies?

Employers are required to pay all wages and meet all other entitlements for their employee as required by state or federal law. This includes payments such as superannuation, insurance costs, occupational health and safety requirements and tax.

Why use wage subsidies?

A wage subsidy provides a financial incentive to employers when considering the employment of job seekers with disability or with other barriers to employment. It may be provided to increase the competitiveness of a job seeker with disability when seeking employment in open labour market conditions. It can also be used to address any additional demands an employer may perceive exist or experience in establishing an employee with disability into the workplace compared to other employees.

You should determine the provision of wage subsidies on a case by case basis depending on the needs of the individual job seeker and the employer. For example, some service providers may offer a wage subsidy to assist employers with the additional cost of training and settling in a new employee. Other service providers may offer subsidies when it is recognised that the person with disability may take some time to learn the job or to understand all the requirements of the job.

It is important to recognise that the long term success of the worker with disability maintaining their employment depends on factors other than the payment of the wage subsidy given that the period for which a wage subsidy is paid is limited. Consequently the notion of buying a job by payment of a wage subsidy is not appropriate and it does not guarantee sustainable employment.

Matching the right person to the right job contributes more to sustainable employment than a wage subsidy. Subsidies can be effective in encouraging an employer to give someone a go, but the employer must be prepared to offer on going employment after the subsidy period ends.

Figure 1. Direct substitution and indirect employment effects of wage subsidies

A design consideration is the subsidy value. In addition to determining how large the subsidy should be, which depends on the program budget, policymakers should first decide how the subsidy should be calculated. A subsidy can be calculated as a fixed amount per worker, in which case it may create an incentive to employ low-wage workers.

Wage Subsidy Programs

Designed to encourage employers to hire the hard-core (longterm) unemployed.

• The subsidy will decrease cost to firm of hiring this type of worker (makes them relatively less expensive).

• Standard program design:

1. Categorical eligibility

2. Only covers new hires

3. Covers workers with w< w_t

4. Subsidy is some % of difference between actual w and wt;

– Subsidy = r(w_t – w_a)

– 5. Subsidy usually temporary.

Effects of Subsidy Program