Impacts of hiring subsidies targeted at the long-term unemployed on the low-skilled labor market: The French experience

a r t i c l e i n f o This paper proposes a theoretical matching framework to analyze firms' and workers' response to a targeted hiring subsidy program when taking into account interactions between segments of the low-skilled labor market. By developing a general equilibrium model, the paper provides a useful tool to evaluate the aggregate effects induced on the low-skilled labor market. Then, the model is computed above French data to estimate the employment and welfare effects of a measure introduced in France in 1995, the " Initiative-for-Employment Contract ". Finally, as the framework is well-suited to investigate design issues, I analyze the efficiency of the French program as well as targeting issues. Employment subsidies cover various types of targeted schemes. Most of the prevailing policies in developed countries are hiring subsidies paid to private employers: for instance the Targeted Job Tax Credit in United States, Employment Subsidies in Sweden and subsidized contracts in France. Contrary to permanent employment subsidies which are mainly targeted at low-skilled or low-wage employment (for instance, reduction in payroll taxes), hiring subsidies are targeted at unemployment (see Orszag and Snower, 2003). Firms benefit from a temporarily subsidized job opportunity for a selected group of new hires. Such programs are not recent: they have been in place in many OECD countries since the end of the seventies. However, the rise in long-term unemployment in the last two decades has lead to a renewed interest in active labor market policies. Researches are increasingly carried out both to evaluate how successful hiring subsidy programs have actually been and then to investigate design issues. A number of empirical studies have pointed out the relative effectiveness of hiring subsidies as a tool to improve employment prospects of the participants. These instruments were found to generate a significantly higher probability to get a job relative to the Brodaty et al., 2002). Further, many evaluations conclude that hiring subsidies to private-sector jobs have a greater impact than public training programs or direct job creation measures (Martin and Grubb, 2001; Sianesi, 2002). Concerning the French experience, Brodaty et al. (2002) investigate the effects on the youth population of labor market policies that have been introduced in France since the mid-seventies. The majority of the programs provide a subsidy and have positive effects on employment. Empirical studies based on individual data are useful to evaluate the impact of a targeted program …