Subsidizing employment

economics ▪ policy ▪

Wanna fight unemployment? Here is an idea from Edmund Phelps to do it:

The best remedy [to the pathologies of a high level of unemployment] is a subsidy for low-wage employment, paid to employers for every full-time low-wage worker they hire and calibrated to the employee’s wage cost to the firm. The higher the wage cost, the lower the subsidy, until it has tapered off to zero.... With such wage subsidies, competitive forces would cause employers to hire more workers, and the resulting fall in unemployment would cause most of the subsidy to be paid out as direct or indirect labor compensation. People could benefit from the subsidy only by engaging in productive work – that is, a job that employers deem worth paying something for.

This is to say that the government provides incentives to firms for employing low-skilled workers. Economists usually don't like the distorting effects of subsidies unless market imperfections can be shown (sometimes, even after). So, Phelps argues:

[The deprivation of low-skilled workers] in turn generates high social costs, including crime, violence, and dependency. The latter pathologies then become a weapon in the populist attack on free enterprise, which Western countries require for economic dynamism – and thus prosperity. So those who are included and benefit by free enterprise, yet are burdened by the social costs of exclusion, should all be willing to pay something to remedy these conditions.

A subsidy to preserve the market. An alluring idea, indeed.

Skimming through Google, I found at least two countries – Canada and New Zealand – that had applied this scheme. Unfortunately, with present institutional gaps (particularly, the absence of a good system to track the poor unemployed), it might be difficult to apply this scheme to Indonesia. Still, an idea to keep for the future.