Case Against Youth Wage Subsidy

Implementing a wage subsidy is not without associated costs – or negative spin‐offs. The first of these is the so‐called ‘deadweight cost’, i.e. firms would have hired the now‐subsidised workers anyway. Thus, the full amount of the subsidy is ‘wasted’ and becomes merely a transfer from government to business.

The second cost is associated with substitution – existing workers may be replaced by subsidised workers. Business may also feel more encouraged to employ younger subsidised workers instead of older non‐subsidised workers.

Thirdly, the subsidy could lead to a situation where businesses with access to cheaper subsidised labour could potentially displace business that do not have access to cheaper labour, thus resulting in job losses and unfair competition. The fourth cost is associated with stigmatisation.

It is argued that business may interpret a subsidised worker as having certain characteristics that make them less desirable. It has been shown that where the subsidies have been applied to targeted marginalised groups, such subsidies have been less than successful. Lastly, another potential negative spin‐off could arise because the subsidy may distort the way people approach employment opportunities. For example, a subsidised worker may believe that he or she only has a chance of employment if it is subsidised; and youngsters may decide to leave school earlier, believing that a subsidy will ensure them employment.

There are, however, some strong counter‐ arguments to these objections. For instance, if the subsidy is administered through the tax system, it should be easy for the authorities to identify companies who are dismissing older workers in order to take advantage of the subsidy. It is questionable to what extent there would be unfair competition, as firms competing against each other would presumably have more or less similar labour requirements, and would thus benefit equally from the scheme.

As for the stigma, and the idea that young people may be induced to leave school early, a proper education and awareness campaign ought to address these concerns.