Evaluation of the Australian Wage Subsidy Special Youth ...

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employed anyway. The displacement effect of a program occurs if it crowds-out regular
employment. Usually, displacement is defined in reference to the fall in output for firms
without subsidised workers where the subsidy leads to increased output for firms with
subsidised workers.
Millard and Mortenson (1997) develop a modified version of job creation and destruction.
There is a two sided matching process where workers search and employers hire, but
there is friction in the matching process and wages are determined by bargaining, and
they simulate the effects of untargeted wages subsidies. In this framework, a small hiring
subsidy is found to reduce equilibrium unemployment only if there are zero redundancy
payments. It is plausible that this is practically true in a low wage or low-skill labour
market, although this is not discussed. However, in order to examine outcomes in the
model, it is calibrated with estimates of key parameters, and the effects of empirical mismeasurement
are not trivial to the model outcomes.
Snower (1994) describes the wage subsidy for his model as a ‘benefit-transfer’. This is
due to his condition that the subsidy amount is linked to the amount of unemployment
benefit the unemployed person would have received instead of the employment subsidy.
The subsidy is again argued to overcome labour market inefficiencies, due to benefit
systems, efficiency wages, insider-outsider processes or unions. Snower (1994) devises
the subsidy value to depends positively on the length of unemployment and the amount of
training the firm provides in the subsidy placement. This design feature is added to
mitigate displacement and deadweight, based on the low employment probabilities faced
by long-term unemployed and lower lay-off chance for trained employees in a firm.
The model Snower (1994) puts forward focuses on the profit-maximizing firm. There are
a fixed number of firms, producing output using labour input (L), with a revenue function
that is a positive function of L, and faces constant firing cost (f):
(8) R= aL – (½)cL 2
Each firm hires entrants L e , and all workers have mortality rate σ set equal to the birth
rate, and entrants become incumbents L i after one period of employment at rate (1-σ).