Do Wage-subsidies Increase Employment in Firms?

The literature evaluating active labour market programmes concentrates on the subsequent labour market performance of the unemployed work force that has undergone training or has spent a certain period in a subsidised job. The effects of programmes on firms have rarely been evaluated. Here we examine whether subsidised jobs have contributed to the employment of firms or merely substituted for non-subsidised ones. We also consider whether other firms have suffered or benefited from subsidies given to firms in a particular industry or geographical location. We analyse a large sample of firms, taken from the registers compiled by the Finnish Tax Authority. Our data set is an unbalanced panel of some 26,000 firms that are followed annually from 1995-1999. Our results indicate that wage subsidies have increased employment in subsidised firms, but the effect has not been large enough. Public subsidies appear to substitute private employment expenditure. However, subsidised firms have not harmed other firms in the same industry or geographical area. In other words, we find a substitution effect, but not a displacement effect.