Stochastic Simulation of Labor Demand Under Wage Subsidization

The impact of a system of wage subsidies, funded by unemployment insurance vouchers, is evaluated by combining a set of disaggregated industry labor demand models with an input/ output model. The program is shown to increase employment initially by lowering the cost of labor to firms. The disposable income of workers is increased which acts as a macroeconomic stimulus. The success of the subsidy program depends to some extent on the degree to which demand induced by greater consumer spending is able to sustain higher employment levels. Overall, it is estimated that a four-quarter wage subsidy equivalent to 30 percent of prevailing industry wages results in a long run decline in unemployment in excess of 1 percent.