Wage Subsidies for Young People – Payroll tax reductions have moderate positive effect, targeted generous and long-lasting hiring subsidies can

Wage and hiring subsidy programmes have been part of the toolbox of Active Labour Market Programmes (ALMPs) for more than 30 years; the recent economic crisis has had a particularly detrimental effect on the labour market situation of youth and a number of European countries have introduced hiring subsidies as a means of fighting youth unemployment. Prompted by the resurgent interest of policy-makers in utilizing subsidies to boost job creation, as well as the lack of comprehensive reviews of such policies specifically targeting youth, this paper is a contribution to filling a knowledge gap. The paper devotes specific attention to the role of design elements in determining the programme effectiveness.

The review finds that hiring subsidies in the form of payroll tax reductions have been found to have rather moderate positive effect on youth’s employment probability. Generous and long-lasting hiring subsidies targeted at disadvantaged youth in Europe, coupled with strict conditionalities for employers, can have more substantial positive effects on the long-term integration of young people into the labour market, not least because they can be more generous. By contrast, short-term hiring programmes are only effective if they comprise a substantial training element. The effects of programmes in lower and middle income countries have been more heterogeneous than in higher income countries; often programme targeting is sub-optimal, employer take-up can be low and short-term employment gains due to programmes tend to fade out relatively quickly.

Chosen excerpts by Job Market Monitor. Read the whole story at What works in wage subsidies for young people: A review of issues, theory, policies and evidence