Contingent wage subsidy

• Date: 01 August 2020
• Published date: 01 August 2020
• DOI: http://doi.org/10.1111/jpet.12451
• Author: Robertas Zubrickas

J Public Econ Theory. 2020;22:1105–1119. wileyonlinelibrary.com/journal/jpet

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1105

Received: 30 November 2019

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Accepted: 20 May 2020

DOI: 10.1111/jpet.12451

ORIGINAL ARTICLE

Contingent wage subsidy

Robertas Zubrickas

Department of Economics, University of

Bath, Bath, UK

Correspondence

Robertas Zubrickas, Department of

Economics, University of Bath, Bath BA2

7AY, UK.

Email: r.zubrickas@bath.ac.uk

Abstract

This paper proposes a policy aimed at tackling un-

employment that arises from macroeconomic coordina-

tion failure. The policy offers firms wage subsidies

payable only if the total number of new hires made

across the economy is below a prespecified threshold.

Subsidies provide incentives for firms to create jobs but

the policy's goal is to generate a sufficiently large amount

of employment spillovers to set off hiring com-

plementarities taking employment beyond the threshold.

Thus, subsidies are not distributed but the policy

achieves a Pareto improvement. The market structure is

important for policy design. Aggregative game techni-

ques prove useful for the oligopsonistic case.

1|INTRODUCTION

New hiring by one firm is a reason for new hiring by other firms because of employment

externalities related to additional aggregate demand, new trading opportunities, or production

synergies. Without a coordinated action, however, the virtuous hiring cycle may not start,

stranding the economy in a low‐employment, low‐spending equilibrium as in the aftermath of

the 2007–2009 financial crisis (OECD, 2016). The traditional approach to this problem em-

phasizes a “big push,”when one large player like the government spends enough to convince

others to spend. In this paper, we show how a “zero push”can achieve the same results.

With the economy in a low‐employment equilibrium, we propose a policy that offers firms

wage subsidies for new hires payable only if the total number of new hires made in the

economy does not exceed a prespecified threshold. An example would be a promise to cover all

new labor costs contingent on that less than, say, 100,000 new jobs are created in total. From a

firm's perspective two outcomes can occur from this policy. One outcome is when the number

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