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Publication Date



Upjohn Institute Working Paper No. 95-31

**Published Version**

In Advisory Council on Unemployment Compensation: Background Papers, Washington, D.C.: The Council, 1995-1996, v.2, pp. [T1]-T61
Long-Term Unemployment and Reemployment Policies, edited by Laurie J. Bassi, Stephen A. Woodbury. Series: Research in Employment Policy, v.2. Stamford, Conn.: Emerald Publishing, 2000, pp. 141-184




An array of innovative policies has been suggested to address more effectively the needs of dislocated workers. In this paper, we model and simulate the impacts of a wage-rate subsidy (or salary supplement) program in which a dislocated worker who becomes reemployed would receive a payment equal to one-half the difference between the wage previously earned and the wage currently earned. The simulations are based on a search model that is institutionally rich and that provides estimates of the impacts of a wage subsidy by incorporating empirical results from the reemployment bonus experiments that were conducted in the mid- to late-1980s. The model includes several groups of workers other than dislocated workers and therefore provides estimates of the degree to which these other workers might be crowded out of jobs by the wage subsidy program. The results suggest that a wage-rate subsidy paid for two years after reemployment would shorten the unemployment spells of dislocated workers by nearly 2 weeks, and would increase employment of dislocated workers by about 900 to 1000 per 100,000 in the labor force. But the simulations also raise the possibility that the gains for dislocated workers could come at the expense of other groups of workers; that is, other groups of workers could experience small increases in unemployment duration, and decreases in employment levels that almost fully offset the gains for dislocated workers. Three factors may mitigate these crowding-out results crowding out is widely dispersed over various groups of non-dislocated workers, the structural changes that result in dislocation of some workers (and drive the need for a policy like a wage subsidy) benefit non-dislocated workers, and the crowding-out results are quite sensitive to one of our assumptions. We also compare the wage-rate subsidy program with a reemployment bonus, and show that the two can be structured so as to give identical results.

Issue Date

January 1995


Prepared for the Advisory Council on Unemployment Compensation ; earlier versions of the paper were presented at the Advisory Council on Unemployment Compensation Research Conference (Portland, Maine, August 1994); Michigan State University (September 1994); the Canadian Employment Research Forum Workshop on Displaced Workers and Public Policy Responses (Montreal, Quebec, December 1994); Midwest Economics Association Annual Meeting (Cincinnati, Ohio, March 30-April 1, 1995).

Subject Areas

LABOR MARKET ISSUES; Job security and unemployment dynamics; Dislocated workers


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Davidson, Carl and Stephen A. Woodbury. 1995. "Wage-Rate Subsidies for Dislocated Workers." Upjohn Institute Working Paper No.95-31. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. https://doi.org/10.17848/wp95-31