Hybrideseminar: Wage and Employment Effects of Wage Subsidies

This paper estimates the wage and employment effects of wage subsidies using a large 2015 national-level reform in France that provides additional financial support to poor working households. While the aim of this policy is to promote work, it can incidentally reduce wages in response to an increase in the labor supply. Using administrative data and a shift-share IV design leveraging variation in the exposure to the reform based on the socio-economic composition of the local working-age population, I show that labor markets exposed to an increase in wage subsidies experience an increase in the growth rate of the number of hours worked and a decrease in the growth rate of the average hourly wage. I find no significant effect on pre-tax labor earnings growth at the local labor market level, as the wage and employment effects are of similar magnitude. These effects suggest a passthrough of wage subsidies to wages equal to 37% on average.