Staff Reports
Subsidizing Job Creation in the Great Recession
May 2010  Number 451
JEL classification: E24, J65

Authors: Sagiri Kitao, Ayşegül Şahin, and Joseph Song

We analyze the effects of various labor market policies on job creation, job destruction, and employment. The framework of Mortensen and Pissarides (2003) is used to model the dynamic interaction between firms and workers and to simulate their responses to alternative policies. The equilibrium model is calibrated to capture labor market conditions at the end of 2009, including the unemployment, inflow, and outflow rates by workers of different educational attainment. We consider the equilibrium effects of a hiring subsidy, a payroll tax reduction, and an employment subsidy. While calibrating parameters that characterize these policies, we try to mimic the policies in the Hiring Incentives to Restore Employment (HIRE) Act of 2010. We find that a hiring subsidy and a payroll tax deduction, as in the HIRE Act, can stimulate job creation in the short term, but can cause a higher equilibrium unemployment rate in the long term. Employment subsidies succeed in lowering the unemployment rate permanently, but the policy entails high fiscal costs.

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