Getting the Unemployed Back to Work: The Role of Targeted Wage Subsidies

This paper examines alternative approaches to wage subsidy programmes. It does this in the context of a recent active labour market reform for the young unemployed in Britain. This “New Deal” reform and the characteristics of the target group are examined in detail. We discuss theoretical considerations, the existing empirical evidence and propose two strategies for evaluation. The first suggests an ex-post ‘trend adjusted difference in difference’ estimator. The second, relates to a model based ex-ante evaluation. We present the conditions for each to provide a reliable evaluation and fit some of the crucial parameters using data from the British Labour Force Survey. We stress that the success of this type of labour market programmes hinge on dynamic aspects of the youth labour market, in particular the pay-off to experience and training. Copyright Kluwer Academic Publishers 1999