Introduction
In both Europe and the United States policy makers have been searching for new labor market measures that keep unemployment low and avoid large disparities in income. This chapter examines two policy proposals that have this aim: (1) unemployment vouchers and (2) low-wage subsidies. The unemployment vouchers are targeted exclusively at the unemployed (especially the long-term unemployed) and are provided for only a limited period of time. The low-wage subsidies, on the other hand, are granted to all low-wage earners regardless of their employment history and are of limitless duration.
Naturally, the impact effects of unemployment vouchers and low-wage subsidies are quite different. Because unemployment vouchers are targeted typically at the long-term unemployed whereas low-wage subsidies are targeted at the low-wage employed, it may be tempting to think that the two policies address different government objectives, namely, that the unemployment vouchers fight unemployment whereas the low-wage subsidies combat working poverty. This impression is misleading, however. Both policies affect the incentives to work. Thus both policies influence both unemployment and working poverty.
The unemployment vouchers are meant to reduce unemployment and inequality by stimulating the employment of those who are currently longterm unemployed; the low-wage subsidies pursue these dual objectives by promoting the employment of the working poor. Broadly speaking, the former promotes equity by reducing unemployment and the latter reduces unemployment by promoting equity.
The effectiveness of the policies in stimulating employment versus alleviating poverty depends on the degree to which their incidence falls on employers versus employees.