This dissertation focuses on the analysis of between-firm displacement effects of marginal employment subsidies (which restrict the subsidy to the extra jobs created by a firm in addition to some reference employment level). We want to find out whether displacement between firms necessarily leads to complete equivalence of marginal and general subsidies, or whether marginal employment subsidies can be advantageous in terms of their employment and fiscal effects even if one takes between-firm displacement effects into account.
We first develop a partial-equilibrium model with perfect competition on the goods market. Unemployment occurs because the wage is too high and rigid. In this setup, we show that marginal employment subsidies create more employment at lower cost than general subsidies despite their displacement effect. The stronger marginal stimulus for employment expansion forces firms into fiercer competition, which results in lower prices, more output demand, and more employment.
We then present a general-equilibrium model with endogenous wage setting. Firms interact on imperfectly competitive goods markets, while wages are determined by firm-level labor unions. Even in this setup, marginal wage subsidies maintain their advantageousness over general subsidies. The reason lies in the asymmetry of marginal wage subsidies: while they subsidize the hiring of new workers, they do not punish firms that lay off part of their workforce. This tames the labor unions. If unions tried to shift the full subsidy into higher wages, it would be profitable for the firms to lay off workers. Unions can prevent this only by exerting wage restraint, which increases equilibrium employment.
This dissertation argues that employment subsidies are a promising instrument for restoring the employment prospects of low-skilled workers. It contributes to the economic literature by providing a comprehensive theoretical comparison between general and marginal employment subsidies. All models presented in this dissertation show that marginal subsidies are a better policy measure because they can create more employment at less fiscal cost. Even when taking their displacement effects into account, the favorability of marginal employment subsidies persists. Despite their drawbacks, marginal employment subsidies are thus a more efficient policy for employment creation than general wage subsidies.