The Effectiveness of Employer Subsidies in Tackling Worklessness

The Public Policy Institute for Wales (PPIW) was asked by the Welsh Government to look at the value of carrying out work into maximising the effectiveness of employer subsidies in providing employment opportunities for the long term unemployed.

As part of the scoping for this assignment, we carried out a rapid review of the international evidence, the headline findings from which are presented below. Ultimately, it was decided that the Welsh Government was well served by ongoing work in this area, and the project has now been withdrawn. The following rapid review was written by PPIW’s Ian Jones. 

Why is this question important?

Internationally, there are many examples of governments using employer subsidies to promote the hiring of the long-term unemployed and people from other disadvantaged groups experiencing worklessness. These measures aim to create new jobs for the unemployed through subsidising wage costs while improving individuals’ employability through work experience.

The unemployment rate in Wales currently stands at 6.1%, above the UK level of 5.3%, while long-term and youth unemployment levels in Wales are also above the UK average. So it is important for policymakers to have reliable evidence about the effectiveness of employer subsidies in tackling worklessness.

International evidence

International evidence on the effectiveness of employer subsidies is mixed but suggests they can be broadly effective in increasing employment levels. Their effectiveness can vary according to how the subsidy is designed and delivered, and there is evidence that wage subsidies can involve significant deadweight.

A recent European Commission review found that take up of employer subsidies can be incentivised when they are large enough to offset employer costs, while also minimising administrative burdens. Direct wage subsidies that are easy to administer appear to be more attractive to employers than other mechanisms. It is also important to ensure that the terms and conditions placed on employers are not perceived as being disproportionate or too burdensome.

Studies have also found that targeting particular disadvantaged groups can increase the efficiency of employer subsidy schemes, while also making it more likely that the needs of those most in need of integration into the labour market are addressed. Tailoring interventions to the challenges faced by particular groups is also more likely to minimise deadweight effects. However, there is a lack of robust evidence regarding the longer term effectiveness of this approach.

Schemes that combine employment with training designed to address skills gaps, or offer targeted training or counselling support for the most disadvantaged groups, may be more effective than those which use employer subsidies in isolation. However, their effect over the longer term is not yet clear. The evidence also suggests that employer subsidies focussed on private sector employment are likely to be effective, while those focussed not-for-profit sectors tend to be ineffective.

There is a lack of conclusive evidence about how employer subsidies perform at different points in the economic cycle (e.g. during periods of growth compared to stagnation). There is some evidence to suggest that a focus on training during downturns, and employer subsidies during recovery periods may be an effective combination, although existing evaluations are not conclusive.

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