Causal effects of wage subsidies on labor supply and labor demand

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The German labor market features a general wage subsidy, which supports more than 7.5 million individuals conditional on not exceeding a monthly earnings threshold of 450 Euros. The stated objectives of the subsidy are to provide a stepping stone for unemployed workers to return to labor market and to generate employment opportunities for hard to place workers, to reduce moonlighting and bureaucracy for minor jobs. The broad utilization of the subsidy suggests that it is economically attractive for employers and workers. At the same time, we know little about whether the instrument is effective in reaching its objectives, whether it features harmful side effects, and whether it crowds workers out of the labor market whose labor supply is substituted by subsidized labor. The proposed project addresses these open issues by investigating the causal effect of the Minijob instrument on labor supply and labor demand. More specifically, (1) we study whether true state dependence ties married spouses to the subsidized forms of Minijob employment. Given the incentives implicit in married couples' income taxation, this is a plausible scenario. We use data from the German Socio-Economic Panel and estimate dynamic multinomial logit models to address this question. We study (2) whether partaking in Minijob employment indeed generates a stepping stone for unemployed workers. We apply rich administrative data (SIAB) to identify causal treatment effects within a propensity score matching framework and separately study transition patterns for the previously unemployed. Finally, (3) we ask whether and how employers adjust their labor demand patterns when subsidized types of employment change prices. Here, we take advantage of vast administrative and survey based firm level datasets (Establishment History Panel and Establishment Panel) to describe the developments and labor demand compositions over time and then to identify substitution patterns and possible effects of cost changes on worker stocks and flows in different types of employment (e.g., Minijob, full-time or part-time).Each of the three subprojects proposes original research questions and applies appropriate research designs to advance the level of knowledge and to extend the national and international literature in innovative ways. The proposed projects benefit from the availability of data sources, which are internationally outstanding in terms of sample size, richness of information, and reliability. Each subproject is socially and economically relevant beyond mere scientific interest; the research objectives can be achieved in the proposed framework and with data that is already available.