Subsidizing low-skilled jobs in a dual labor market

Abstract

A large exclusion from the labor market or an important unemployment of low-skilled workers is observed in some developed economies in which a minimum wage has been introduced. In such circumstances, governments may adopt two kinds of policies. They may pay unemployment benefits or they may try to increase demand for low-skilled labor by subsidizing low-skilled jobs. In this paper, we propose a matching model which allows to analyze the effects of these policies on the labor market. In our framework, the government budget is balanced through taxes on occupied workers and classical and frictional unemployment simultaneously exist. The labor market is dual featuring low-skilled and high-skilled workers. Low-skilled jobs pay the minimum wage, while high-skilled wages result from bargaining. Moreover, high-skilled unemployed can apply for both types of jobs thereby accepting to be downgraded, while opportunities for low-skilled workers are limited to low-skilled jobs. We first give conditions for the existence and uniqueness of a steady- state equilibrium and we analyze the effects of several fiscal instruments. In this set-up, increasing low-skilled job subsidies does not necessarily reduce low-skilled unemployment or unemployment spells. We provided empirical evidence by calibrating our model on French labor market data, it is found that for five low-skilled workers leaving classical unemployment, two high-skilled workers are downgraded (although they might have been previously unemployed).Crowding-out, Matching, On-the-job search, Taxation