Optimal Employment Subsidies and Market Structures in Industries with Unemployment: The case of Complete Information

In this paper we analyse the issue of optimal employment subsidies in industries in a distortion in the labour market generates involuntary unemployment. As a benchmark case, we focus on monopolies and duopolies and on complete information between firms and governments. We show that giving optimal subsidies is equivalent to the superposition of the classic regulation problem in which the government owns the firms and acts as a central planner and the acquisition problem in which government should acquire the private firms at the shadow cost of public funds. We derive the optimal levels and creations of employment. Quite interestingly, those levels can be larger in the least productive firms because of the distortion in the labour market. We finally study the industry structures in the two frameworks in which subsidies must be accepted either by all firms or only by selected ones.