Abstract
Within a heterogeneous-firms model with endogenous labour supply, intra-industry competitive selection is shown to affect the impact of wage (and entry) subsidies. Optimal uniform wage subsidies are always positive even though, by reducing industry selectivity, they lower average productivity. Due to international selection and fiscal externalities, non-cooperative policies entail under-subsidisation of wages. Targeted (domestic-only or export) wage subsidies are dominated from a welfare point of view by a uniform subsidy. Whilst always having an opposite effect on average productivity, an optimal entry subsidy is shown to be less effective than an optimal uniform wage subsidy in raising employment and welfare.
| Original language | English |
|---|---|
| Pages (from-to) | 1154-1177 |
| Number of pages | 24 |
| Journal | Review of International Economics |
| Volume | 26 |
| Issue number | 5 |
| Early online date | 26 Jul 2018 |
| DOIs | |
| Publication status | Published - Nov 2018 |
Bibliographical note
We thank Holger Görg, Philipp Schröder, Fredrik Sjöholm, participants at the Danish International Economics Workshop, seminar participants at Aberdeen, Sheffield and Loughborough, three anonymous referees and the Editor of the journal, for helpful comments and suggestions. Funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 290647 is gratefully acknowledged.Keywords
- optimal policy
- wage subsidies
- competitive selection
- international trade
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Catia Montagna
- Business School, Economics - Jaffrey Chair of Political Economy
- Centre for Energy Transition
- Business School, Aberdeen Centre for Research in Energy Economics and Finance (ACREEF)
- Business School, Centre for Labour Market Research (CeLMR)
Person: Academic