DO WAGE SUBSIDIES REDUCE ORDINARY EMPLOYMENT?

Transcription

1 05:2007 WORKING PAPER Mohammad Azhar Hussan Martn Rasmussen DO WAGE SUBSIDIES REDUCE ORDINARY EMPLOYMENT? A Frm Level Panel Data Analyss RESEARCH DEPARTMENT OF EMPLOYMENT AND LABOUR MARKET ISSUES

2 Do Wage Subsdes Reduce Ordnary Employment? A frm level panel data analyss Mohammad Azhar Hussan & Martn Rasmussen Employment and Labour Market Issues Workng Paper 05:2007 The Workng Paper Seres of The Dansh Natonal Insttute of Socal Research contan nterm results of research and preparatory studes. The Workng Paper Seres provde a bass for professonal dscusson as part of the research process. Readers should note that results and nterpretatons n the fnal report or artcle may dffer from the present Workng Paper. All rghts reserved. Short sectons of text, not to exceed two paragraphs, may be quoted wthout explct permsson provded that full credt, ncludng -notce, s gven to the source.

3 Do Wage Subsdes Reduce Ordnary Employment? - A frm level panel data analyss Mohammad Azhar Hussan* Martn Rasmussen The Dansh Natonal Insttute of Socal Research Abstract: Applyng admnstratve regster data nformaton for Dansh frms n 1999, 2000, and 2001, ths paper nvestgate how the employment of wage subsdzed labour affects ordnary employment at the frm level. Descrptve statstcs as well as econometrc estmatons are presented. Descrptve analyss shows that ordnary and subsdzed employment s postvely correlated,.e. employment of subsdzed labour does not reduce ordnary employment. But an underlyng smlar movement n producton levels mght cause the correlaton. Smple ncluson of a producton level proxy n OLS estmatons does not suffcently control for the underlyng correlaton, but addtonal control for the sze of the change of producton ndcates that subsdzed labour to some extent substtutes non-subsdzed labour. But the substtuton depends on the appled econometrc specfcaton,.e. a cumulatve logt specfcaton gves mxed results concernng the substtuton effect. Keywords: Frm level employment, wage subsdy schemes, substtuton effects JEL classfcaton: J38; M51 * Correspondng author. E-mal: mh@sf.dk. Phone: Fax: Postal address: The Dansh Natonal Insttute of Socal Research, Herluf Trolles Gade 11, DK-1052 Copenhagen K, Denmark

4 Contents 1. Introducton Exstng lterature Wage subsdy schemes: a theoretcally deal polcy wth practcal problems An deal wage subsdy scheme Practcal problems Substtuton Wage subsdy schemes n Denmark Descrpton of frms use of subsdzed employment Data descrpton, defnton of subsdzed and data lmtatons Dstrbuton of subsdzed labour n frms Frm characterstcs: subsdzed and non-subsdzed employment levels Frm characterstcs: changes n subsdzed and non-subsdzed employment Estmaton Employment levels Dfferences n employment Cumulatve logt estmaton Concluson and dscusson References Appendx

5 1. Introducton Actve labour market polcy (ALMP) s used more extensvely by the publc authortes snce the frst half of the 1990s. Wage subsdy programmes targeted, for example at longterm unemployed or dsabled people, are a partcular type of ALMP. Wage subsdes to employers s a method of mprovng the earnngs and employment chances of low-wage workers. By far, most of the economc evaluatons of ALMP have focused on whether a gven polcy actually helps the partcpants. For wage subsdy programmes, however, t s equally mportant to ask whether a gven polcy reduces the labour market prospects of workers not elgble for a subsdy,.e. negatve effects for the ordnary labour market partcpants resultng from mprovng the labour market stuaton of the targeted group(s). In ths paper, we estmate whether non-subsdzed employment s reduced f a (prvate) frm employs subsdzed labour. We use a unque frm-level panel data set: For frms n Denmark durng , we count the number of subsdzed workers and relate t both to frm producton and to the number of workers employed on ordnary terms. Estmaton results are mxed, especally because controllng properly for frm sze s dffcult. Thus, we attempt to control for frm sze or growth of frm sze n varous ways. Very few emprcal studes at the frm level estmate the substtuton between subsdzed and non-subsdzed labour resultng from wage subsdy programmes. The low number of such studes s n contrast to the vast amount of emprcal papers on actve labour market polces at the ndvdual level. The lterature dstngushes between varous substtuton effects, all of whch are demand sde effects and can be categorsed as follows: 1. Workers already employed on ordnary terms are dsmssed. E.g., a person already employed on ordnary terms may be transferred to employment on terms of a wage subsdy programme. If ths person would have contnued on ordnary terms, had 3

6 the subsdy scheme not been avalable, the transfer would have been a case of substtuton. 2. The frm reduces the number of new workers t wll hre on ordnary terms. Agan, a specal case s that a frm may want to employ a partcular person, whether or not subsdes are avalable. 3. Competton between frms s dstorted f a frm that receves wage subsdes gets a compettve advantage and ncreases ts sales at the expense of other frms. In ths paper, we study the aggregate substtuton effect on current and new workers (type 1 and 2) wthout dstngushng between the two, but we relate the dscusson of the extng lterature below to the three effects mentoned above as well as to the type of data source, whch can be categorzed n the followng way: a. Econometrc studes at the frm level (we apply ths approach). b. Substtuton drectly measured by survey respondents. c. Econometrc studes at an aggregate level. d. Econometrc studes at the level of ndvduals. The outlne of the paper s as follows: Secton 2 revews the exstng lterature. In secton 3 we brefly present the core of the economc motvaton for wage subsdy programmes. In secton 4 we gve a bref descrpton of Dansh wage subsdy schemes. Sectons 5 and 6 consttute the man part of the paper: secton 5 descrbes the methodology, whle econometrc models are appled n secton 6. Secton 7 concludes. 2. Exstng lterature We have found only three studes of the group a. approach. One uses regster data (Kangasharju, 2005), and two use survey data (Bshop and Montgomery, 1993, and Hujer, 2002). Of these three, Bshop and Montgomery s econometrc approach s closest to the one we wll apply. 4

7 There are a lot of studes of the remanng approaches (b.-d.), but snce they are all qute dfferent from our study w.r.t. method and to some extent subject, we wll descrbe ths lterature only by a few examples. Kangasharju (2005) and workng papers precedng t are the only studes we have found on substtuton based on regster data at the frm level. A part from some frm characterstcs, Kangasharju has nformaton on the amount of wage subsdes each Fnnsh frm receves durng the perod He studes the effect of subsdes on the wage sum n the frm. Kangasharju s man purpose s to compare the frms whch receve a subsdy wth those that do not. That s, n most of the estmatons he uses a 0/1-dummy rather than a contnuous varable to characterze the amount of wage subsdes n a frm. Kangasharju uses dfference-n-dfference estmators and matchng methods to compare frms that receve wage subsdes wth frms that do not, and fnds that wage subsdes mply a sgnfcant ncrease n the total wage sum. Kangasharju statstcally controls for a number of frm characterstcs, e.g. sales, and concludes that the wage subsdy scheme lead to an ncrease n employment. The results show only a small substtuton effect f any. In fact, one of hs estmatons suggests that non-subsdzed labour ncreases as a result of employment of subsdzed labour (even after controllng for frms sales). Kangasharju also studes dstorton of competton between frms by ncludng regon and ndustry-specfc aggregate wage subsdes n the analyss. But also here he fnds no sgnfcant effects. Bshop and Montgomery (1993) apply an approach very smlar to the one we wll apply to evaluate the Targeted Job Tax Credt (TJTC) program n the USA. Ther data set s a survey of frms durng a perod of two years. Bshop and Montgomery estmate the ncrease n total employment as a functon of the ncrease n subsdzed labour. Smple OLS estmates suggest that total employment ncreases by 0.3 persons or less when the number of subsdzed workers ncreases by 1, and hence a substtuton effect on exstng and new workers of at least 0.7. The possble dstorton of competton works between frms and hence va the frms sales. Snce Bshop and Montgomery control for sales, the substtuton effect of 0.7 does not nclude such dstorton effects. A pror, Bshop and Montgomery expect selecton effects to bas smple OLS estmates, and hence they are careful to nclude survey questons that could serve as nstruments for partcpaton. Two 5

8 stage least squares does not, however, gve results that are as reasonable as the OLS estmates. Hujer et al. (2002) apply a survey of frms n West Germany. They use methods smlar to Kangasharju (2005) to compare frms that receve wage subsdes wth frms that do not. They do not fnd sgnfcantly postve effects of recevng subsdes, perhaps because the number of frms that receve subsdes s low. We wll now consder lterature based on surveys and drect measures of substtuton (group b. above). In surveys, a typcal queston to a frm manager or a partcpant s: Would the work have been performed by anyone else, f wage subsdes had not been avalable?. Answers are presumably meant to reveal substtuton effects on exstng and new workers. 1 A pror, one may suspect based answers from managers who want to gve the mpresson that ther frm lves up to the poltcal ntentons of the wage subsdy schemes, e.g. some managers mght ncorrectly deny any substtuton between ordnary and subsdzed labour. As we wll see below, t s however lkely that such bas s lmted. Fnally, surveys are useful to dstngush between whether exstng or new workers are affected by subsdes, and whether t s the same person (already employed) that s employed wth subsdes rather than on ordnary terms. Calmfors et al. (2001) survey lterature on the effect of ALMP n Sweden, ncludng studes of substtuton effects. The results of the estmated substtuton effect vary from 1% to 84%. Calmfors et al. note that the closer the partcpants are to regular employment, the hgher the effect. A revew of prvate sector employment subsdes n OECD countres shows that the combned dead-weght loss and substtuton effects are around 90 per cent (Martn and Grubb, 2001). 1 In prncple however we cannot preclude that answers also reflects that a frm manager ntends to ncrease producton at the expense of competng frms. But n that case, surveys do not estmate dstorton of competton, because surveys do not nform about how the compettors employment s actually affected. 6

9 For Denmark, the Natonal Labour Market Authorty (2005) conducted a survey of frms. Among prvate frms wth subsdzed labour, 52 percent say they would have employed (current or new) workers on ordnary terms f the subsdy schemes had not exsted. Of these, just over half of the frms would have employed the person who receved a subsdy on ordnary terms and the remanng part would have employed another person. Estmaton of the effects of subsdes on current workers s a man ssue n the study, snce t s not allowed to dsmss non-subsdzed workers as an mmedate consequence of employng subsdzed workers. The study fnds only small effects on current workers, thus, the major part of the 52 per cent mentoned earler relates to new workers. Holt et al. (2003) fnds that 38 percent of prvate frms wth subsdzed labour say they would have employed workers on ordnary terms had the subsdy schemes not exsted. One explanaton for the dfferences n results compared to the survey conducted by the Natonal Labour Market Authorty (2005) could be that Holt et al. studes a wder range of wage subsdy programmes. In general, the relatvely hgh substtuton effect found n survey studes may ndcate that frm managers do not bas ther responses much to appear n accordance wth the poltcal ntensons of the subsdy programmes. A number of studes use data that are aggregated across regons or countres (group c. above). The regonal varaton n the use of wage subsdy programs, or more generally ALMP, s related to employment growth. The studes measure the substtuton of exstng and new workers, but not the dstorton of competton between frms, because compettve effects on ndvdual frms are aggregated out at least f regons do not compete wth each other. Compared to a frm-level approach, ntra-regonal varaton n data s of course neglected wth aggregate data. On the other hand, one may beleve regonal varaton n the use of wage subsdy programmes to be exogenous. Calmfors et al. (2001) also survey ths strand of lterature (for Swedsh regons). These studes fnd substtuton effects of approxmately 60 per cent,.e. somewhat hgher than average effects from the survey approach. Edn et al. (1998) studes youth wage subsdy programmes crowdng out of general youth employment, and fnds sgnfcant but small effects usng 7

10 aggregated data from Swedsh muncpaltes. It s obvously possble that the programme crowds out workers from other age groups. Fnally, we turn to the econometrc lterature on the effects on ndvdual partcpants of wage subsdy programmes (group d. above). From some of these studes substtuton effects can be nferred, because the studes compare the employment effects of the program on treated workers (the subsdzed) to a specfc control group (the nonsubsdzed). The control group may nclude unemployed people not elgble for the treatment (the subsdy). A program wth a negatve effect on the control group may ndcate a substtuton effect on new workers, and on the partcular control group,.e. t may be that unemployed persons not elgble for a wage subsdy face a relatvely low chance of gettng a job because employers demand s drected towards subsdzed unemployed. Blundell et al. (2001) studes a programme though not a subsdy programme applyng the treatment/control group approach, but fnds no substtuton effects Wage subsdy schemes: a theoretcally deal polcy wth practcal problems Ideally, wage subsdes have many vrtues compared to other types of government support for people facng dffcultes n the labour market, but an deal scheme may, however, be dffcult to carry out n practce. In ths secton we brefly try to explan the theoretcal vrtues of wage subsdy schemes and how practcal problems, e.g. too hgh levels of wage subsdes, may dstort the labour market An deal wage subsdy scheme Two features characterze an deal wage subsdy scheme. Frst, the subsdy, b, to person covers the dfference between the potental wage that person s able to earn and a 2 Smlarly, Katz (1996) studes the effect on targeted group of a wage subsdy programme. However, hs study may also ndcate that the non-targeted control group s affected by the wage subsdy programme, and thus ths knd of effect on the control group could be nterpreted as a substtuton effect. 8

11 mnmum ncome level determned by the polcy maker, mn y (e.g. per month). If the labour market works well, we know from standard arguments that the employer wll end up payng a wage for the servce of worker that equals the value of the person s contrbuton to producton. We denote the value of the contrbuton to producton q (e.g. per month). Hence the deal wage subsdy n a well functonng labour market s b < = 0 otherwse mn mn y q for q y Second, a purpose of many wage subsdy programmes s to ncrease partcpants productvty, e.g. through pure learnng-by-dong, but n some cases the subsdzed worker receves educaton, extra nstructon from colleagues, or the worker may mply extra costs for the employer n some other way. The employer may therefore receve a subsdy, e, to cover these costs, c, of mprovng productvty. The subsdy scheme therefore combnes concern for dstrbuton wth effcency, snce people wth low productvty to begn wth, wll be able to supply ther labour and have an ncome above what ther ntally low level of productvty would generate Practcal problems In practse, t s obvously very dffcult for the ALMP-authorty to estmate the productve value of a worker, q, and thus to estmate the approprate wage subsdy, b. Smlarly, t s dffcult to determne the beneft, e, and to ensure that the employer actually carres the costs, c. In table 3.1, the cost and benefts of employment of a subsdzed worker s descrbed for the employer and the employee. We assume that b s formally pad to the worker, and e to the employer. The deas below are smple and statc, and thus we assume that.e. educaton efforts, e, lead to an ncrease n productvty and thus wage n a later perod. We do not take workers possble dsutlty of workng nto account. 9

12 Table 3.1. Subsdy related costs and benefts for employer and employee Employer Employee Cost w + c mn y, f the alternatve to a job s a passve beneft equal to mn y Beneft q e w + b + Now suppose the publc benefts, b and/or e, are too generous. Table 3.2 descrbes the possble advantages of ths case for the employer and employee respectvely. Table 3.2. Subsdy related gans from excessve benefts Employer gets the advantage of Employee gets the advantage of the excessve the excessve subsdy subsdy b s too hgh, mn b > y q (Assume e = c) e s too hgh e > c (Assume mn b = y q ) Consequence Case A mn w = y b < b + q b = q Case C w = q q + e c > q = w The employer wll hre as much subsdzed labour as possble Case B w = q mn w + b > w + y q = y mn Case D w = q + e c and w+ b = w+ y q = q+ e c+ y q > y mn mn mn The subsdzed worker has a relatvely large ncentve to supply labour mn If b s too hgh, but the worker receves y, the employer wll gan from the large subsdy by payng less than the value of the worker s producton ( w < q, case A) mplyng hgh demand for subsdzed workers. The demand for subsdzed labour may however lead to an ncrease n the wage rate, w, so that the subsdzed workers may eventually also gan mn from the large b by havng a total ncome above the mnmum ( w + b > y, case B). Cases C and D, where the educaton subsdy to employers are hgher than the educaton costs, are parallel to A and B. In case C, the employer gets e c as a premum for hrng a subsdzed worker, whch leads to hgh demand for subsdzed workers. Hgher demand may agan lead to a hgher wage rate and a gan for the subsdzed worker (Case D). 10

13 3.3. Substtuton In secton 2 we descrbed varous substtuton effects between subsdzed and nonsubsdzed labour. If subsdy rates are correctly set, e.g. mn b= y q and e= c, we should not expect to see competton between frms wth subsdzed labour and other frms beng dstorted. We should however expect to fnd that employment of subsdzed labour leads to less employment of non-subsdzed labour (substtuton effects on current and new workers). For example, f a subsdzed worker produces half as much as a non-subsdzed worker, we would expect a frm to be ndfferent between hrng two subsdzed workers or one non-subsdzed worker. 4. Wage subsdy schemes n Denmark In secton 3 we saw how wage subsdes, productvty and wage rates were related from a standard theoretcal pont of vew. In ths secton, we brefly descrbe the most mportant wage subsdy schemes n Denmark wth respect to the same varables and wth respect to the legal rules concernng substtuton. 3 Many wage subsdes are related to the ordnary wage rate, whch n practce presumably means the mnmum of normally pad wages. But there are no mnmum wage-laws n Denmark. Wages are negotated between workers unons and employers organzatons. Thus, n stead, we use the term agreed mnmum wage rather than mnmum wage, and we gnore that the agreed mnmum wage vares across ndustres and occupatons. 3 From 2003 (after the estmaton perod we consder), rules have been smplfed. Informaton about the schemes are found n the relevant law texts Lov om en aktv arbejdsmarkedspoltk (Law about an actve labour market polcy), and Lov om en aktv socalpoltk (Law about an actve socal polcy) and on the homepage of the mnstry of employment Useful nformaton can also be found on the homepage of the Natonal Labour Market Authorty From 2003 Lov om en aktv beskæftgelsesndsats (Law about an actve employment effort) replaced parts of the other two laws. All these texts are n Dansh. 11

14 The local labour market authortes arrange contacts between the unemployed and the frm. For some subsdy schemes, the local workers unon representatves approve work condtons, wage rates etc. Flex job: (Fleksjob). The programme s desgned for people wth lmted work capacty who, n absence of the program, mght have appled for dsablty beneft. The wage subsdy s 1/2 or 2/3 of the agreed mnmum wage. The wage rate actually pad to the worker s allowed to be hgher than the agreed mnmum wage. There s no tme lmt on the job, but each work contract s reconsdered regularly by the authortes. There are no rules requrng that a Flex job-worker cannot substtute non subsdzed workers. Relef job: (Skånejob). The programme s for people who receve dsablty benefts, whch they contnue to receve whle partcpatng n the Relef job programme. The wage subsdy (on top of the dsablty beneft) s 50 percent of the wage but no more than 1/6 of the agreed mnmum wage. There s no tme lmt on the job. There are no rules concernng substtuton. On-the-job tranng: (Jobtrænng). The programme s for people who have been unemployed for some tme and have receved unemployment nsurance beneft or socal assstance. Workng condtons and wages follow ordnary terms. The wage subsdy s approxmately equal to half of agreed mnmum wage. If the duraton of the job s longer than 6 months, part of the job-spell should consst of educaton. Establshment of on-thejob tranng should ncrease employment and s not allowed to dstort competton. Indvdual on-the-job tranng: (Indvduel jobtrænng). The programme s for people who receve socal assstance or unemployment nsurance beneft, but as opposed to Onthe-job tranng the workng tme s ndvdually determned. Compared to partcpants of On-the-job tranng, partcpants of Indvdual on-the-job tranng have greater dffcultes obtanng a regular job. The wage subsdy s negotated. The wage rate s negotated for unemployment nsurance benefcares. For socal assstance recpents the wage rate equals the level of socal assstance. Establshment of Indvdual on-the-job tranng s not allowed to dstort competton, and the work carred out ought not to have been done so n the absence of the wage subsdy. 12

15 Adult apprentces: (Voksenlærlnge). The scheme may be closer to ordnary educaton than to a wage subsdy programme. The scheme s for people of at least 25 years of age wantng an educaton or wantng to re-educate themselves. The scheme s for employed as well as for unemployed. The apprentceshp may last for 4 years. The apprentce obtans an agreed mnmum wage. Wage subsdes are pad from the apprentce fund The Employers Pupl Rembursement (Arbejdsgvernes elevrefuson), and n some cases also from the unemployment nsurance fund. The wage subsdy s therefore usually relatvely hgh compared to the wage rate. In table 4.1, we attempt to relate the dfferent wage subsdy schemes to the agreed mnmum wage and wth publc beneft rates. Table 4.1. Wage subsdes and beneft rates as an approxmate proporton of agreed mnmum wage Unemployment nsurance beneft 0.9 Socal assstance 0.8 On-the-job tranng 0.5 Indvdual on-the-job tranng Negotated or 0.8 Flex job 2/3 Relef job Adult apprentces 1 1 Partcpants n Relef jobs receves dsablty beneft. Untl 2003, there were several levels for the dsablty beneft rate and the maxmum level was approxmately equal to the unemployment nsurance beneft level Wth the excepton of on-the-job tranng, the wage subsdes are close to ether the prevously receved beneft or an agreed mnmum wage rate. The actual wage rate pad to the subsdzed worker s however allowed to exceed the agreed mnmum wage rate 4. In our data set, we have wage nformaton for some of the subsdzed workers. Generally, wage statstcs n Denmark are recorded by employers. There s however no establshed rule of whether or not frms should keep records of wages for subsdzed workers. Table 4.2 shows the hourly wage rate for subsdzed workers by the type of wage subsdy program. The table also shows the number of hours worked per week. The fracton of subsdzed workers whose wage rate s recorded s low and t vares across the type of subsdy scheme. Hence, we do not know whether these statstcs are representatve for all subsdzed workers. 4 Ths s true for prvate frms. Publc frms are not allowed to pay above a certan level for On-the-job tranng. 13

16 Table 4.2. Wage and work-hour statstcs for subsdzed workers, 2001 Wage rate per hour (DKK) No. of obs. 1 st quartle Medan 3 rd quartle 9 th decle No. of obs. Hours per week Mean Thrd quartle On-the-job tranng 2, , Indvdual on-thejob tranng 1, , Flex job 5, , Relef job , Adult apprentces 3, , Accordng to the fgures n table 4.2, the wage structure s very flat among subsdzed workers, and the medan wage s low. A full-tme job n Denmark conssts of 37 hours of weekly work, and (surprsngly) many subsdzed workers work full tme. The unemployment nsurance beneft rate was approxmately 80 DKK per hour n For comparson, the agreed mnmum wage rate for uneducated workers was approxmately 86 DKK, but not many earn such a low wage rate: the 25 th percentle for the hourly wage rate was DKK for women n a low-wage sector. (1 DKK equals EUR.) 5. Descrpton of frms use of subsdzed employment Before contnung to tables contanng descrptve statstcs on Dansh frms use of dfferent knds of government subsdzed labour, we frst present the appled data Data descrpton, defnton of subsdzed and data lmtatons All data n ths workng paper stems from admnstratve regsters mantaned by Statstcs Denmark. We have nformaton on all persons who were n subsdzed employment durng , and we have nformaton on all Dansh workplaces and frms n the same three year perod. Informaton on the partcpants n the subsdzed programmes s from the AMFORA, whch s a regster of person-level detaled nformaton on type of partcpaton 14

17 n unemployment schemes, start and end dates of partcpaton, the number of hours n the scheme per week, and the dentty of the frm and work place n queston. From the busness regsters FIDAFIRM, IDAS, and IDLH we ncluded nformaton on locaton, ndustry, sector, number of employed (n aggregate and by type of occupaton and educaton), wage sum, average wage rates, value added, profts, and sales. Sample szes are lsted n table 5.1. Table 5.1. Number of subsdzed persons, work places and frms n November, 1999, 2000 and Persons 29,931 35,154 40,113 Frms 146, , ,186 Note: Only subsdzed persons who could be connected to a frm n November are ncluded. For nstance for 2001 the selecton procedure reduces the number of subsdzed from 63,002 (155,045 subsdy spells) to the mentoned 40,113 (71,781 spells) The employment statstcs n the offcal regsters concerns subsdzed and non-subsdzed employment n the aggregate. Snce we need to dstngush between the two, we combne frm regsters wth regsters on the ndvdual persons who receve wage subsdes. For each frm we are therefore able to count the number of people employed wth a wage subsdy. However, some data manpulaton s necessary. The nformaton on frms s from the end of November n a gven year, whereas nformaton on a person s spells of subsdzed employment covers the whole year. In order to secure perod wse correspondence between persons and frms, only subsdzed employment spells n November are consdered. Furthermore, only spells whch could be connected to a frm are ncluded. Snce a person can have more than one subsdzed spell durng the year and durng November, the fnal spell attached to a person s the one wth longest duraton n November, whch underestmates the number of subsdzed persons. The number of subsdzed s, however, less nterestng n t self n ths paper, whereas changes and relatve dstrbutons of the subsdzed s of greater nterest. But t creates some selectvty as persons wth long subsdy duratons have a hgher probablty of beng selected nto the data set, because we only nclude persons wth subsdes n the month of November. E.g. subsdy schemes wth no or long duraton lmts are overrepresented n the data set. After makng the changes n the dataset, we have about 40,000 persons n subsdzed employment n almost 150,000 frms n November The number of frms s farly 15

18 stable from 1999 to 2001, whereas the number of subsdzed persons ncreases wth about 5,000 per year n the perod - manly due to the ncreased popularty of the flex job scheme whch was ntroduced n the late 1990s. Subsdzed labour ncludes all persons who are employed wth some knd of subsdy from the government. That prmarly ncludes flex job, on-the-job tranng, adult apprentces, relef job, ndvdual on-the-job tranng, and servce job, see Secton 4.1 for detals Dstrbuton of subsdzed labour n frms Subsdzed labour can be employed n the prvate as well as n the publc 5 sector, but somewhat dfferent sets of rules apply to the two sectors, see secton 4. Wth 138,000 frms n the prvate sector, t has the man share of frms (Table 5.2). About 10,000 frms exsted n the publc sector n Less than 500 frms were owned by foregners or ownershp was not possble to determne. Because the decsons about whether to employ subsdzed labour most lkely dffers between sectors, we wll dstngush between subsdzed employment n the publc and prvate sector. Furthermore, producton s much more dffcult to measure n the publc sector. Table 5.2. Sectoral dstrbuton of frms n Denmark, Publc 9,889 8,255 9,871 Prvate 136, , ,957 Foregn Total 146, , , per cent of frms wthout subsdzed labour were prvate, whle the fracton of prvate frms among frms wth subsdzed labour s only 86 per cent (Table 5.3). Thus, although frms are mostly n the prvate sector, almost half of all 40,000 subsdzed persons n November 2001 were employed n the publc sector. On average publc frms employ 1.90 subsdzed persons per frm, whle prvate frms employ 0.15 subsdzed persons per frm. All n all, the average frm employs 0.27 subsdzed persons. 5 Statstcs Denmark s defnton of publc sector s appled, see e.g. Offentlge Fnanser, Statstske Efterretnnger, February Thus, the publc sector ncludes the general government sector, publc quas-corporatons, publc corporatons, publc corporatons ncludng e.g. ralways, S-tran, buses, marnas and ndustral harbours, arports, sewerage and refuse dsposal 16

19 Table 5.3. Publc and prvate employment of subsdzed labour n frms, 2001 Frms wth Frms wthout Subsdzed labour subsdzed labour Number Per cent Number Per cent Total no of subsdzed workers Average no of subsdzed workers Publc 2, , , Prvate 13, , , Foregn Total 16, , , Publc frms on average employ 0.72 persons n flex job schemes, 0.62 get on the on-thejob tranng, and 0.23 persons are n relef jobs. The most appled schemes n the prvate sector are flex job, on the on-the-job tranng and adult apprentces, each of whch have an average of 0.04 per frm. These four schemes are the most appled as they account for almost 90 per cent of all subsdzed employment n 2001 (Table 5.4). Table 5.4. Sector and scheme dstrbuton of subsdzed employment n Denmark, 2001 Job tranng Indvdual job tranng Flex jobs Relef jobs Servce jobs Adult apprentces Other All Average number of subsdzed per frm Publc Prvate Foregn All No of subsdzed 11,378 2,423 13,101 4,410 1,982 6, ,113 - Per cent A major part of subsdzed employment (approxmately 12,000 persons n 2001) s located n the captal Copenhagen or n one of the three other bggest ctes n Denmark (Table 5.5). Localzaton pattern s due to more subsdzed employment per frm n bg ctes, especally n the publc sector, where the average subsdzed employment s 3-5 persons per frm n bg ctes and only 1.5 persons n other ctes. 17

20 Table 5.5. Sector and geographcal dstrbuton of subsdzed employment n Denmark, 2001 Publc Prvate Foregn Total Number of subsdzed Copenhagen 3,438 1, ,091 Odense ,712 Aarhus 1,547 1, ,235 Aalborg ,679 Other 11,911 16, ,396 18,748 21, ,113 Average number of subsdzed per frm Copenhagen Odense Aarhus Aalborg Other Almost half (19,600) of all subsdzed labour s employed n publc and personal servces, and a large part of those (18,000) s n the publc sector (Table 5.6). The publc sector has very few n other ndustres, only about 500 are employed wth transportaton, storage and communcaton, and 200 are n fnancal ntermedaton and other busness actvtes. In the prvate sector subsdzed employment s more equally dstrbuted among ndustres. Almost 1/3 (6,700) s occuped n wholesale, retal trade, hotels and restaurants. 5,500 are occuped n manufacturng, and 3,400 n constructon. 18

21 Table 5.6. Sector and ndustry wse dstrbuton of subsdzed employment n Denmark, 2001 Publc Prvate Foregn Total Number of subsdzed Agrculture, fshng and quarryng Manufacturng 1 5, ,539 Electrcty, gas and water supply Constructon 5 3, ,374 Wholesale and retal trade, hotels, restaurants 54 6, ,799 Transport, storage and communcaton 523 1, ,635 Fnancal ntermedaton, busness act , ,172 Publc and personal servces 17,915 1, ,648 Actvty not stated Mssng All 18,748 21, ,113 The precedng tables llustrates that explanng dfferences n subsdzed employment must take nto account whether the frm s n the publc or prvate sector, and where t s located as well as to whch ndustry t belongs. But a part of these characterstcs explanatory power may very well be due to underlyng dfferences n frm szes/sales whch are correlated wth the same varables, e.g. larger frms n the captal area or n manufacturng ndustry Frm characterstcs: subsdzed and non-subsdzed employment levels A frst mpresson of how subsdzed employment n a frm depends on ts actvty level and changes n the actvty level s possble by smple descrptve tabulatons. Here we wll look at employment and sales, both ther levels and changes n levels. Subsdzed and non-subsdzed employment There seems to be a postve (lnear) correlaton between the number of ordnary employed workers n a frm and the average number of employees at the frm level, cf. Fgure 5.1. Publc frms wth up to 5 ordnarly employed workers on average have between 0.02 and 0.1 subsdzed workers employed, and prvate frms have between 0.03 and Subsdzed employment ncreases to 0.4 for publc frms and 0.2 for prvate frms wth ordnary employees, and to about 1 subsdzed employee per publc and 0.5 per prvate 19

22 frm wth ordnary employment at workers. Thus, subsdzed employment ncreases wth the number of ordnarly employed workers n both the publc and the prvate sector, but the ncrease seems to be much faster n publc frms than n prvate frms, when the number of ordnarly employed s above a certan level (approxmately 8). The postve correlaton s also very much present when lookng at sngle subsdy schemes presented n Table 5.4. Fgure 5.1. Subsdzed employment and ordnary employment, Avg. subsdzed employment No. of ordnary employed Publc Prvate All Fgure 5.1 seemngly rejects the hypothess that employment of subsdzed labour reduces the employment of non-subsdzed labour. Dfferent explanatons for a rejecton can be put forward, an mportant one beng that frm producton levels most lkely are not constant when subsdzed or non-subsdzed labour ncreases or decreases. Thus, a postve correlaton between producton and subsdzed employment, and between producton and non-subsdzed employment can cause a spurous postve correlaton between subsdzed and non-subsdzed labour. 20

23 Snce some frms wth many ordnary employed workers, as expected, also generally employ many subsdzed workers, t s clearly not possble to detect any substtuton effect wthout a thrd varable to control for frm sze,.e. the ncome effect. Sales Our data does not drectly nclude a producton varable so nstead we use frm sales from sale of products and servces as a proxy for producton levels ndcatng frm sze. Sales are measured n nomnal terms at producer prces. Table 5.7. Subsdzed and non-subsdzed employment and prvate frms sales, mo. DKK, 2001 Relatve dstrbuton Average employment of employment, % Non-subsdzed Subsdzed Non-subsdzed Subsdzed Under 1 mo mo mo mo mo mo mo mo mo mo mo mo mo Mssng Total Employment 1,700,505 21,329 Snce sales are usually not a meanngful concept for publc frms, only prvate frms are ncluded n the followng. Frms wth less than 1 mo. DKK n sales on average have 1.9 non-subsdzed employee and 0.04 employed workers wth subsdes. These numbers ncrease to 6.1 and 0.12 for sales between 4 and 5 mo. DKK, and about 18 and 0.3 for frms wth sales n the range mo. DKK, cf. Table 5.7. As expected, the postve relatonshp between subsdzed and non-subsdzed employment of labour n Fgure 5.1 reflects dfferences n producton. About 60 per cent of subsdzed labour s employed n 21

24 frms wth sales less than 20 mo. DKK, whle that s only the case for about 45 per cent of non-subsdzed workers, whch means that subsdzed labour, s overrepresented n smaller frms. Industry Manufacturng has an average of 0.42 subsdzed workers per frm, whch s the hghest average among ndustres, but the observaton smply reflects that manufacturng frms on average are large, see Table 5.8. Otherwse there s not much correlaton between subsdzed and non-subsdzed frm employment and ndustry. Thus, ndustry seems to have some explanatory power regardng varatons n subsdzed employment. Table 5.8. Subsdzed and non-subsdzed employment n ndustres. Prvate frms, 2001 Relatve Average employment dstrbuton of employment, % Non- Nonsubsdzed Subsdzed subsdzed Subsdzed Agrculture, fshng and quarryng Manufacturng Electrcty, gas and water supply Constructon Wholesale and retal trade, hotels, restaurants Transport, storage and communcaton Fnancal ntermedaton, busness act Publc and personal servces Actvty not stated Mssng Total Employment, 1,000 1, Lookng at the relatve dstrbuton of the two labour types, t s clear that subsdzed employment s overrepresented n constructon (16 and 9 per cent of total subsdzed and non-subsdzed labour) and wholesale etc. (32 and 28 per cent). Subsdzed employment s underrepresented n fnancal ntermedaton etc. (9 and 18 per cent), whch s most lkely due to the relatvely more unsklled labour s employed n the two former ndustres compared to the latter. 22

25 Locaton Although the captal Copenhagen employs the greatest number of non-subsdzed workers per frm (19), t employs the lowest number of subsdzed employees (0.11), see Table 5.9. Whle Odense has much lower non-subsdzed employment (12) than Copenhagen, t employs double the number of subsdzed workers (0.22). Agan, locaton also seems to contrbute to explanng varatons n the number of subsdzed employees. Table 5.9. Subsdzed and non-subsdzed employment and frm locaton. Prvate frms, 2001 Average employment Relatve dstrbuton of employment Non-subsdzed Subsdzed Non-subsdzed Subsdzed Copenhagen Odense Aarhus Aalborg Other Total Sales, ndustry, and locaton specfc sub-samples Non-subsdzed and subsdzed employment clearly vares wth sales levels, ndustry and locaton of frm. In Fgure 5.2 we smultaneously try to control for all three factors, and thus try to get more homogenous frms. For Copenhagen we have ncluded frms wth sales between 1 and 4 mo. DKK n 2001, but only ncluded frms n wholesale etc., because sample szes are too small n other ndustres (less then 100 frms). In non-bg ctes we could lmt sales even more (to 3-4 mo. DKK) and stll have reasonable sample szes (over 100 frms). In the fgure we have depcted lower and upper values of 95 per cent confdence ntervals for the mean value of the number of subsdzed employed (second axs) condtonal upon a gven number of non-subsdzed employed (frst axs). Fgure 5.2 reflects that dfferent ndustres have dfferent levels of subsdzed employment. We also see that subsdzed employment vares somewhat wth the level of non-subsdzed employment, but not n a systematc way,.e. there s not an entrely postve correlaton between the two types of employment, whch s n contrast to Fgure 5.1. Furthermore, we see that changes n subsdzed employment are often nsgnfcant for dfferent levels of 23

26 non-subsdzed employment, suggestng agan that the postve relatonshp s questonable, and thus that a substtuton between subsdzed and non-subsdzed labour s not ruled out. Fgur 5.2. Subsdzed and non-subsdzed employment n prvate frms n Copenhagen (Cph) and n non-bg ctes. 95% confdence ntervals (lower and upper lmts) Subsdzed Non-subsdzed Wholesale: Cph Manufacturng Constructon Wholesale Note: Only observatons wth at least 100 observatons are ncluded. Frms n Copenhagen are lmted to those wth sales between 1 and 4 mo. DKK, frms outsde the bggest ctes n Table n 5.9 are lmted to those wth sales n the range 3-4 mo. DKK Frm characterstcs: changes n subsdzed and non-subsdzed employment Another way of detectng substtuton effects between subsdzed and non-subsdzed labour s by lookng at changes n employment levels. In order to calculate changes we need nformaton on the same frm for the two years 2000 and Almost 104,000 frms were observed n both years (Table 5.10). About 41,000 of those frms dd not experence any change n non-subsdzed employment, whle 93,000 dd not go through any changes n subsdzed labour. 39,000 frms dd not have any change n ether knd of employment. More than 2/3 (71,000) of the frms only had a change of 1 employee n any type of employment. Thus, relatvely few frms change the number of subsdzed workers. 24

27 Table Change n subsdzed and non-subsdzed employment n prvate frms, or less -5 to -4-3 to -2-1 Change n subsdzed employment: Unchanged or more All Change n non-subsdzed employment: -6 or less , , to , , to , , , , Unchanged , , , , , , , , or more , , All ,647 92,637 4, ,395 Per cent Per cent Table Average change n subsdzed employment condtonal on change n nonsubsdzed employment from 2000 to 2001 Wholesale, 1-10 mo. All DKK Copenhagen Average Std. error No. of frms Average Std. error No of frms Change n nonsubsdzed employment: -11 or less * , to , to , to * , * , Unchanged , * , * , , * , or more * , All * , ,770 * Sgnfcant at 5 per cent level or less On average subsdzed employment was almost unchanged from 2000 to 2001 (Table 5.11). Frms who ncreased ther non-subsdzed employment by 1 reduced ther subsdzed 25

28 employment by , the same reducton was seen n frms wth non-subsdzed employment ncreases of 2 or 3 from 2000 to Frms who reduced ther ordnary employment by 1, 2 or 3 non-subsdzed persons had an ncrease n subsdzed employment. Ths negatve correlaton somewhat lends support to a relatonshp sayng that ncreases n subsdzed employment decreases the employment of non-subsdsed labour. Changes n subsdzed employment for frms ncreasng ther non-subsdzed employment by 4-5 workers or reducng t by 4-10 were only assocated wth nsgnfcant changes n the levels of subsdzed labour. Fnally, ncreases n non-subsdzed employment exceedng 6 persons are correlated wth sgnfcantly postve ncreases n subsdzed employment. And decreases n non-subsdzed employment exceedng 11 are assocated wth a sgnfcant decrease n subsdzed employment of Ths postve correlaton s evdence aganst the substtuton hypothess. In order to agan control for producton effects, the second half of Table 5.10 only ncludes frms n wholesale etc. n Copenhagen wth sales between 1 and 10 mo. DKK n All changes n subsdzed employment n these frms are nsgnfcant at the 5 per cent level, leavng us wth no evdence for or aganst the substtuton hypotheses. 6. Estmaton In ths secton we estmate the relatonshps between the central varables: subsdzed labour, non-subsdzed labour and producton. In secton 6.1 we estmate across frms. In secton 6.2 we remove (level-) fxed frm effects by usng dfferenced varables. Bascally we seek to estmate the relatonshps between non-subsdzed labour, o, subsdzed labour, s, and producton, y. We do, however, not estmate a well specfed producton functon, but rather some emprcal relatonshps between the varables. Thus, we gnore.e. use of captal and productvty parameters. In terms of secton 2, we estmate the 26

29 substtuton of subsdzed for non-subsdzed workers wthn the frm for current and new workers n the aggregate. We do not estmate dstorton of competton between frms Employment levels In ths secton we estmate the relatonshp between employment of subsdzed labour, employment of non-subsdzed labour and producton (all n levels). In equaton (6.1) below, the β s are the parameters to be estmated, and e s the error term. We nclude other characterstcs of the frm (e.g. ndustry dummes) denoted by x. The model s (6.1) o= β0 + βss+ βyy+ βxx+ e We expect that the employment of one extra subsdzed worker reduces the employment of non-subsdzed workers by up to one,.e. βs ( 1,0). In model (6.1), small and large frms are compared, and we control for frm sze by ncludng (a) producton level (proxy), y. Alternatvely, a more mechancal way of estmatng the relatonshp between producton and labour s o s (6.2) = β0 + βs + βxx + e y y Prncpally, model (6.1) s of course less restrctve than model (6.2), because (6.2) assumes a partcular relatonshp between labour and producton. But gven the fact that we do not estmate the dynamcs of the relatonshp between labour and producton and that research shows the relatonshp to be sluggsh, (6.2) may nevertheless represent a better long run relatonshp between labour and producton. Table 6.1 shows the results from estmatng the two models. 27

30 Table 6.1. Estmaton of frms ordnary employment, Model (6.1) Model (6.2) Parameter (std. dev.) Parameter (std. dev.) Subsdzed employment (2001) (0.159) Sales (2001) ( ) Subs. empl./sales (2001) (0.095) No. of frms 94,840 92,451 R Note: OLS estmatons, 27 ndustry dummes ncluded. Table A1 n the appendx lsts summary statstcs for the appled data set In both models the parameter related to subsdzed employment does not make much sense as a substtuton parameter,.e. the estmate of β s far outsde the range of -1 to 0 (meanng that one subsdzed worker - accordng to these estmates - doesn t substtute between 0 and 1 non-subsdzed worker, as antcpated). The postve, large and statstcally sgnfcant estmates, ˆs β, presumably smply reflects the fact that frms wth many employees of one type of labour also have many employees of other types of labour. The ncluson of the producton level, y, apparently, s not suffcent to control for frm sze. Perhaps the lack of a descrpton of the dynamcs between labour and producton s a reason for the nsuffcency. Estmates may be based f for example some frms are labour ntensve and thus use more of all (both) types of employment. To account for such fxed effects (fxed wth respect to levels), we estmate the producton functon n dfferences n secton 6.2. s 6.2. Dfferences n employment We estmate the models (6.3) Δ o= β + β Δ s+ β Δ y+ β x+ e 0 s y x and o s Δ = β0 + βsδ + βxx+ e y y 28

31 We defne dfferences over two years,.e. from 1999 to 2001 (the entre data perod). Table 6.2 shows the results Table 6.2. Estmaton of change n frms ordnary employment, Model (6.3) Model (6.3) o Response varable: Δo Response varable: Δ y Parameter (std. dev.) Parameter (std. dev.) Change n subsdzed employment (0.24) Change n sales (0.0013) Change n the rato of subsdzed Employment to sales (0.015) No. of frms, N 94,522 91,876 R Note: OLS estmatons, 27 ndustry dummes ncluded The concluson drawn from estmatons n Table 6.2 s smlar to that n the prevous secton drawn from estmatons n levels,.e. we do not estmate sensble substtuton parameters n the range -1 to 0. Presumably, the explanaton s smlar to that n secton 6.1, namely that frms wth a large ncrease of some type of employment also ncrease ther use of other types of employment. Applcaton of annual rather than b-annual perods to defne dfferences reduces the estmated parameters sgnfcantly, whch s expected, snce short term fluctuatons become more mportant. In models (6.1) to (6.3) we gnore any dynamc adjustments to long run equlbrum. In order to control for dynamc adjustments n a smple manner, we ncluded lagged varables, but qualtatvely the conclusons reman unchanged, meanng the estmated parameters ˆs β were stll outsde the (-1,0) nterval. Dfferences n employment, controllng for sales changes Here we agan estmate parameters based on dfferences n employment levels,.e. changes n ordnary employment from an ntal year (1999 or 2000) to a destnaton year (2000 or 2001). Ths gves us three possble regressons based on the years: , , 29