Wage Subsidies for the Disadvantaged

Wage subsidies to private employers have often been proposed by economists as a potentially flexible and efficient method to improve the earnings and employment of low-wage workers. This paper lays out the basic economics of wage subsidies; examines issues arising in the design of alternative forms of wage subsidies; and reviews evidence on the effectiveness of recent U.S. wage subsidy programs and demonstration projects. Wage subsidies to employers to hire disadvantaged workers appear to modestly raise the demand for labor for those workers. Stand-alone wage subsidies (or employment tax credits) that are highly targeted on very specific groups (such as welfare recipients) appear to have low utilization rates and may (in some cases) stigmatize the targeted group. But new evidence based on an examination of changes in eligibility rules for the Targeted Jobs Tax Credit, the major U.S. wage subsidy program for the economically disadvantaged from 1979 to 1994, suggests modest positive employment effects of the TJTC on economically disadvantaged young adults. Policies combining wage subsidies with job development, training, and job search assistance efforts appear to have been somewhat successful in improving the employment and earnings of specific targeted disadvantaged groups.