Job Subsidies and Cuts in Employers’ Social Security Contributions: the Verdict of Empirical Evaluation Studies

In many European countries and elsewhere, governments rely on employment subsidies and cuts in employers’ social security contributions to improve the employment prospects of the long-term unemployed and other vulnerable groups in the labour market. Policy makers often justify this strategy by referring to theoretical analyses and simulations which suggest that such measures have strong positive effects on the employment and mobility chances of beneficiaries. This paper brings together findings from recent empirical evaluation studies which have tried to gauge the actual effectiveness of such measures. Although the paper includes findings from studies which look at nonor broadly targeted measures, the emphasis is on measures which are aimed at stimulating the recruitment of long-term unemployed persons and other vulnerable groups in the labour market. The most striking overall finding is that the net employment effects of such measures generally turn out to be substantially lower than what most theoretical models and simulations predict, even under relatively pessimistic assumptions. This finding is particularly striking because of its consistency across studies. This appears mainly due to larger than expected deadweight losses and, to a lesser extent, substitution effects. The second striking finding is that there is little evidence that targeted subsidies have a beneficial effect on the later careers of beneficiaries. A period of subsidised employment can even have a negative impact on beneficiaries’ future employment prospects. JEL Classification J31, J23