Evaluation of the Australian Wage Subsidy Special Youth ...

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(1) applying to all of a firm’s employees, also called a wage bill subsidy
(Haveman (1982));
(2) applicable only to net changes in the firm’s employment, also termed a marginal stock
subsidy (Haveman (1982));
(3) for new hirings by a firm, which Haveman (1982) labels a recruitment subsidy.
The first of these is not treated here. Most commonly, wage subsidies are introduced with
the aim of being of a marginal stock subsidy, but usually it is only practicably possible to
ensure a subsidy is a recruitment subsidy. In the later analysis of SYETP, it will be
noticeable that it is a targeted recruitment subsidy.
Kaldor (1936) gave the early introduction of the use of wage subsidies as a remedy for
‘chronic’ unemployment by reducing the cost of labour. Micro-economic theory provides
a framework for the expected effects of wage subsidies on the level and structure of
unemployment, with partial equilibrium analysis. In general, the labour market is
assumed to be inefficient in operation, and the subsidy acts against this inefficient
outcome.
A wage subsidy paid to the employer is expected to act by stimulating demand for these
workers, and so raise employment. The wage subsidy is anticipated to act by reducing the
cost of labour relative to other inputs. In a traditional model, the labour and capital are
balanced to profit maximise, and the reduction in the cost of labour leads to an incentive
for a profit-maximising firm to substitute labour for capital. There is then the possibility
of an additional scale effect, where lower costs increase demand via reduced prices that
stimulate an expansion of the firm’s scale of production, and in turn employment levels.
A net employment effect then results from the interaction of the substitution and scale
effects.
Where the wage subsidy is targeted at a specific group of workers, then labour is split
between subsidised and unsubsidised workers, and the substitution effect may work only
so that subsidised workers replace unsubsidised workers. In this case, any net