Revenue-Sharing Subsidies as Employment Policy: Reducing the Cost of Stimulating East German Employment

Abstract

This paper provides a brief overview of the East German employment problem and the deficiencies of the employment policies in the first years after unification, and then builds a simple model in which alternative policy proposals can be analyzed. Only two proposals are considered here: (i) wage subsidies, which many economists recommended to replace the array of employment stimuli,¹ and (ii) revenue-or profit-sharing subsidies, which this paper seeks to draw to policy makers’ attention. Revenue-or profit-sharing subsidies had received as good as no consideration in the public debate on how to raise East German employment efficiently. This paper suggests that this might have beean a serious omission. Given the labor market conditions in East Germanyin the first years after unification, it appears likely that the social and budgetary costs associated with revenue-or profit-sharing subsidies would have been and still may be significantly lower than those associated with wage subsidies.²

See, for example, Akerlof et al. (1991)

It would be trivial to analyze other employment policies — particularly output, investment, export, and credit subsidies in the context of the model 1 — and to derive the associated social and budgetary costs, although for brevity I do not do so here. Suffice it to say that the reasons that make revenue-sharing subsidies attractive relative to wage subsidies also apply, with a few modifications, to output and investment subsidies.