Wage Subsidies and Employment: An Analysis of the French Experience1

George Kopits

doi:10.5089/9781451972559.024.A004

Jump to Content Jump to Main Navigation

Wage Subsidies and Employment: An Analysis of the French Experience¹

Author: Mr. George Kopits

Publication Date:: 01 Jan 1978

eISBN:: 9781451972559

Language:: English

Keywords:: SP; rate of inflation; money supply; wage elasticity; wage bill; wage rate; wage cost; money wage; Employment; Employment subsidies; Labor markets

Download PDF (1.7 MB)

Until recently, industrial nations have followed the Keynesian prescription of applying general expansionary fiscal and monetary policies as the principal means of fighting unemployment. During the 1970s, however, faced simultaneously with soaring unemployment and double-digit inflation, governments became disenchanted with traditional demand management tools and began resorting increasingly to an arsenal of selective measures related to factor use.2 The underlying rationale is that the latter are likely to provide an immediate stimulus to employment, with less risk of overheating the economy. Prominent among such measures are various fiscal incentives to the private sector, including wage subsidies.3

Abstract

Until recently, industrial nations have followed the Keynesian prescription of applying general expansionary fiscal and monetary policies as the principal means of fighting unemployment. During the 1970s, however, faced simultaneously with soaring unemployment and double-digit inflation, governments became disenchanted with traditional demand management tools and began resorting increasingly to an arsenal of selective measures related to factor use.² The underlying rationale is that the latter are likely to provide an immediate stimulus to employment, with less risk of overheating the economy. Prominent among such measures are various fiscal incentives to the private sector, including wage subsidies.³

A marginal wage subsidy is ordinarily provided to employers to offset a portion of wage payments to workers who otherwise would be unemployed; in contrast, a general wage subsidy is paid to employers to reduce the wage bill for their entire work force.⁴ The subsidy is either categorical—if it is limited to employers or employees with particular industrial, regional, demographic, or other characteristics—or universal, if applied regardless of such characteristics. Although in the past various types of categorical subsidies were deployed to alleviate regional or structural unemployment (or to provide income support to disadvantaged groups),⁵ lately they have been instituted for the most part in marginal form for a limited time period to combat cyclical unemployment.

After a brief review of temporary wage subsidies implemented in major industrial countries and a discussion of wage subsidies in general, the paper focuses on France’s prime d’incitation à la création d’emploi (Incentive Bonus for Job Creation). A labor input model is specified and estimated using quarterly data (disaggregated by major industrial branch) for that country’s nonfinancial nonfarm sector. The parameter estimates are used to forecast levels of employment for comparison with actual levels beyond the estimation period, in order to assess the subsidy’s effectiveness. The paper concludes with a discussion of the lessons derived from the overall analysis of wage subsidies and the specific evaluation of the French measure.

I. Temporary Wage Subsidies

Over the last four years, the industrialized world has experienced rates of unemployment that are unprecedented in postwar history. Besides offering broad therapy through demand management and symptomatic relief through stepped-up unemployment compensation, several of the hardest-hit countries (including some less developed ones) sought to provide a more effective palliative with temporary wage subsidies and other selective short-term measures. The Federal Republic of Germany, France, Ireland, Jamaica, Japan, the Netherlands, New Zealand, Spain, Sweden, the United Kingdom, and the United States⁶ have implemented temporary marginal wage subsidies, often in combination with categorical features and, in some cases, with on-the-job training requirements. In addition, Italy and the Netherlands introduced temporary general wage subsidies by way of social security tax reductions.⁷ Most marginal wage subsidies take the form of cash grants to eligible employers, except the recent American and Spanish income tax credits and the French social security tax exemption. Also, unlike other countries’ marginal subsidies, which are applied to workers hired by an employer or to an employer’s wage bill above a prescribed base level, in Japan, Sweden, and the United Kingdom the subsidies are disbursed with respect to workers declared redundant by the employer yet retained in his work force.

A detailed outline of temporary marginal wage subsidies (excluding those that contain training requirements) enacted between 1974 and 1977 in the Federal Republic of Germany, France, the United Kingdom, and the United States is given in Table 1. Their principal characteristics relate to the nature of the disbursement (method, amount, and duration) and the target population (eligible employers and employees).

Table 1.

Temporary Wage Subsidies in Major Industrial Countries¹

^¹Excluding training-related subsidies.

^²Décret No. 75-436 instituant à titre exceptionnel une prime d’incitation à la création d’emploi, of June 4, 1975, amended September 19, 1975, February 3, 1976, March 31, 1976, and January 26, 1977.

^³Employees hired under Employment and Training Contract subsidies are not eligible for the Incentive Bonus.

^⁴Décret No. 77-713 and loi No. 77-704 portant diverses mesures en faveur de l’emploi des jeunes et completant la loi No. 75-574 tendant à la generalisation de la securité sociale of July 5, 1977.

^⁵Richtlinien zur Gewährung von besonderen arbeitsmarktpolitischen Beschäftigungshilfen of December 16, 1974.

^⁶A Mobility Subsidy, provided to unemployed persons (eligible for the Wage Cost Subsidy) who move to another municipality for employment, is available in addition to the Wage Cost Subsidy.

^⁷Under authority of Employment and Training Act (c. 50, sec. 5 (1)) of July 25, 1973, and Employment Protection Act (c. 71, schedule 14) of November 12, 1975, subsidy was introduced on August 18, 1975; and amended on September 24, 1975; December 17, 1975; February 12, 1976; April 6, 1976; and March 30, 1977.

^⁸Between August 18 and September 24, 1975, eligibility was restricted to assisted areas.

^⁹Tax Reduction and Simplification Act (P.L. 95-30) of May 23, 1977.

Table 1.

Temporary Wage Subsidies in Major Industrial Countries¹

Country and Subsidy		Method of Payment	Amount and Duration	Eligible Employer	Eligible Employee	Effective Dates
France
	Incentive Bonus for Job Creation²	Cash grant (taxable) to eligible employers.	F 500 per month per eligible worker during the initial 6 months of employment.	(1) Any employer who hires an eligible worker, for at least one year, without reduction for economic reasons in the establishment’s work force below that of June 4, 1975. (2) Any craftsman or small employer (with less than 10 employees) who hires an eligible worker, for at least one year, without reduction for economic reasons in the establishment’s work force below that of June 4, 1975. This base level of employment was subsequently brought forward to January 26, 1977.	(1) Any person who is hired by an eligible employer (other than a craftsman or small employer), and is either unemployed and registered for employment at least 6 months prior to being hired; or under 25 years of age seeking first employment; or discharged from active military duty and registered for employment. ² (2) Any person who is hired by an eligible craftsman or small employer, and is either unemployed and registered for employment; or under 25 years of age; or discharged from active military duty and registered for employment. Since January 26, 1977, eligibility has been restricted to any person who is hired by an eligible craftsman or small employer, and is either under 20 years of age seeking first employment or has been discharged from active military duty within 6 months prior to being hired.³	(1) Hiring by an eligible employer (other than a craftsman or small employer) must take place between June 4 and November 30, 1975. (2) Hiring by an eligible craftsman or small employer must take place between June 4, 1975 and December 31, 1977.
	Social Security Tax Exemption⁴	Exemption of eligible employers from payment of social security contributions.	Employer’s social security contribution (cotisations au titre des assurances sociales, des accidents du travail el des prestations familiales) on wages of eligible workers through June 30, 1978. In the case of apprentices, the exemption is granted for the duration of the apprenticeship contract, up to a maximum of 2 years.	(1) Any employer who hires an eligible worker (other than an apprentice) for at least 6 months, without reduction for economic reasons in the establishment’s work force below the level of May 1, 1977, or in its average yearly work force below the preceding year’s level. (2) Any employer who hires a worker under a registered apprenticeship contract.	(1) Any person under 25 years of age who has left academic studies, apprenticeship, professional formation, or active military duty within one year prior to being hired. (2) Any person hired under a registered apprenticeship contract.	Hiring must take place between July 5 and December 31, 1977.
Germany, Fed. Rep.
	Wage Cost Subsidy⁵	Cash grant (taxable) to eligible employers.	Sixty per cent of the basic wage of eligible workers during the initial 6 month, of employment.	Any employer who hires an eligible worker for permanent position, without reduction in the establishment’s work force below its level of December 10, 1975, and declares that he would not have hired the worker in the absence of the subsidy.	Any person unemployed for at least 3 months prior to being hired and living in a region where the unemployment rate was above the average national unemployment rate by at least 0.5 per cent from September 1975 through November 1975.⁶	Hiring must take place between December 10, 1974 and May 1, 1975.
United Kingdom
	Temporary Employment Subsidy⁷	Cash grant (taxable) to eligible employers.	£ 10 per week per eligible full-time worker during the following 6 months of employment (excluding leave time); increased to 12 months of employment for applications made after February 12, 1976; and increased to £20 per week for applications made after April 6, 1976. Since March 30, 1977, a Supplementary Temporary Employment Subsidy equivalent to one half of the normal amount is provided to eligible employers for up to 6 months of additional employment. All payments are reduced by one half with regard to eligible part-time workers.	Any employer who files jointly with the trade unions concerned an application for subsidy, after deciding to dismiss a number of workers whom he declares to be redundant. The minimum qualifying redundancy per employer was 50 workers prior to December 17, 1975, which was then lowered to 25 until February 12, 1976, and was thereafter lowered to 10 workers. Further, the employer must not be insolvent or about to become insolvent, and must abide by the Government’s pay limit.⁸	Any full-time worker (working at least 35 hours a week) or part-time worker (working between 21 and 35 hours a week) whose job is declared redundant by an eligible employer.	Application must be made between August 18, 1975 and March 31, 1978.
United States
	New Jobs Tax Credit⁹	Credit against income tax of eligible employers. The employer’s deduction of wages is reduced by the amount of the credit.	Fifty per cent of the lesser of the following amounts: (1) the increase in the current year’s wage bill subject to the Federal Unemployment Tax Act (FUTA) above 102 per cent of the previous year’s FUTA wage bill, (2) the increase in the current year’s total wage bill above 105 per cent of the previous year’s total wage bill, and (3) 50 per cent of the wage bill subject to FUTA. The credit is limited to a yearly maximum of US$2,100 per employee and US$100,000 per employer. Credit in excess of current tax liability can be carried back 3 years and forward 7 years.	Any employer (other than certain tax-exempt organizations) who employs eligible workers, and whose wage bill subject to the Federal Unemployment Tax Act (FUTA) has increased above 102 per cent of the previous year’s FUTA wage bill, and whose total wage bill has increased above 105 per cent of the previous year’s level.	Any employee who is employed by an eligible employer and is covered by the Federal Unemployment Tax Act (FUTA) system, is an agricultural employee, or is a railroad employee.	Employment must take place between January 1, 1977 and December 31, 1978.

^¹Excluding training-related subsidies.

^³Employees hired under Employment and Training Contract subsidies are not eligible for the Incentive Bonus.

^⁵Richtlinien zur Gewährung von besonderen arbeitsmarktpolitischen Beschäftigungshilfen of December 16, 1974.

^⁶A Mobility Subsidy, provided to unemployed persons (eligible for the Wage Cost Subsidy) who move to another municipality for employment, is available in addition to the Wage Cost Subsidy.

^⁸Between August 18 and September 24, 1975, eligibility was restricted to assisted areas.

^⁹Tax Reduction and Simplification Act (P.L. 95-30) of May 23, 1977.

Table 1.

Temporary Wage Subsidies in Major Industrial Countries¹

Country and Subsidy		Method of Payment	Amount and Duration	Eligible Employer	Eligible Employee	Effective Dates
France
	Incentive Bonus for Job Creation²	Cash grant (taxable) to eligible employers.	F 500 per month per eligible worker during the initial 6 months of employment.	(1) Any employer who hires an eligible worker, for at least one year, without reduction for economic reasons in the establishment’s work force below that of June 4, 1975. (2) Any craftsman or small employer (with less than 10 employees) who hires an eligible worker, for at least one year, without reduction for economic reasons in the establishment’s work force below that of June 4, 1975. This base level of employment was subsequently brought forward to January 26, 1977.	(1) Any person who is hired by an eligible employer (other than a craftsman or small employer), and is either unemployed and registered for employment at least 6 months prior to being hired; or under 25 years of age seeking first employment; or discharged from active military duty and registered for employment. ² (2) Any person who is hired by an eligible craftsman or small employer, and is either unemployed and registered for employment; or under 25 years of age; or discharged from active military duty and registered for employment. Since January 26, 1977, eligibility has been restricted to any person who is hired by an eligible craftsman or small employer, and is either under 20 years of age seeking first employment or has been discharged from active military duty within 6 months prior to being hired.³	(1) Hiring by an eligible employer (other than a craftsman or small employer) must take place between June 4 and November 30, 1975. (2) Hiring by an eligible craftsman or small employer must take place between June 4, 1975 and December 31, 1977.
	Social Security Tax Exemption⁴	Exemption of eligible employers from payment of social security contributions.	Employer’s social security contribution (cotisations au titre des assurances sociales, des accidents du travail el des prestations familiales) on wages of eligible workers through June 30, 1978. In the case of apprentices, the exemption is granted for the duration of the apprenticeship contract, up to a maximum of 2 years.	(1) Any employer who hires an eligible worker (other than an apprentice) for at least 6 months, without reduction for economic reasons in the establishment’s work force below the level of May 1, 1977, or in its average yearly work force below the preceding year’s level. (2) Any employer who hires a worker under a registered apprenticeship contract.	(1) Any person under 25 years of age who has left academic studies, apprenticeship, professional formation, or active military duty within one year prior to being hired. (2) Any person hired under a registered apprenticeship contract.	Hiring must take place between July 5 and December 31, 1977.
Germany, Fed. Rep.
	Wage Cost Subsidy⁵	Cash grant (taxable) to eligible employers.	Sixty per cent of the basic wage of eligible workers during the initial 6 month, of employment.	Any employer who hires an eligible worker for permanent position, without reduction in the establishment’s work force below its level of December 10, 1975, and declares that he would not have hired the worker in the absence of the subsidy.	Any person unemployed for at least 3 months prior to being hired and living in a region where the unemployment rate was above the average national unemployment rate by at least 0.5 per cent from September 1975 through November 1975.⁶	Hiring must take place between December 10, 1974 and May 1, 1975.
United Kingdom
	Temporary Employment Subsidy⁷	Cash grant (taxable) to eligible employers.	£ 10 per week per eligible full-time worker during the following 6 months of employment (excluding leave time); increased to 12 months of employment for applications made after February 12, 1976; and increased to £20 per week for applications made after April 6, 1976. Since March 30, 1977, a Supplementary Temporary Employment Subsidy equivalent to one half of the normal amount is provided to eligible employers for up to 6 months of additional employment. All payments are reduced by one half with regard to eligible part-time workers.	Any employer who files jointly with the trade unions concerned an application for subsidy, after deciding to dismiss a number of workers whom he declares to be redundant. The minimum qualifying redundancy per employer was 50 workers prior to December 17, 1975, which was then lowered to 25 until February 12, 1976, and was thereafter lowered to 10 workers. Further, the employer must not be insolvent or about to become insolvent, and must abide by the Government’s pay limit.⁸	Any full-time worker (working at least 35 hours a week) or part-time worker (working between 21 and 35 hours a week) whose job is declared redundant by an eligible employer.	Application must be made between August 18, 1975 and March 31, 1978.
United States
	New Jobs Tax Credit⁹	Credit against income tax of eligible employers. The employer’s deduction of wages is reduced by the amount of the credit.	Fifty per cent of the lesser of the following amounts: (1) the increase in the current year’s wage bill subject to the Federal Unemployment Tax Act (FUTA) above 102 per cent of the previous year’s FUTA wage bill, (2) the increase in the current year’s total wage bill above 105 per cent of the previous year’s total wage bill, and (3) 50 per cent of the wage bill subject to FUTA. The credit is limited to a yearly maximum of US$2,100 per employee and US$100,000 per employer. Credit in excess of current tax liability can be carried back 3 years and forward 7 years.	Any employer (other than certain tax-exempt organizations) who employs eligible workers, and whose wage bill subject to the Federal Unemployment Tax Act (FUTA) has increased above 102 per cent of the previous year’s FUTA wage bill, and whose total wage bill has increased above 105 per cent of the previous year’s level.	Any employee who is employed by an eligible employer and is covered by the Federal Unemployment Tax Act (FUTA) system, is an agricultural employee, or is a railroad employee.	Employment must take place between January 1, 1977 and December 31, 1978.

^¹Excluding training-related subsidies.

^³Employees hired under Employment and Training Contract subsidies are not eligible for the Incentive Bonus.

^⁵Richtlinien zur Gewährung von besonderen arbeitsmarktpolitischen Beschäftigungshilfen of December 16, 1974.

^⁶A Mobility Subsidy, provided to unemployed persons (eligible for the Wage Cost Subsidy) who move to another municipality for employment, is available in addition to the Wage Cost Subsidy.

^⁸Between August 18 and September 24, 1975, eligibility was restricted to assisted areas.

^⁹Tax Reduction and Simplification Act (P.L. 95-30) of May 23, 1977.

Concerning the nature of the payment, these subsidies are subject to income tax either directly (in the case of cash grants) or indirectly (Both the American income tax credit and the French social security tax exemption reduce the employer’s wage deduction pari passu.), thereby cutting substantially the net value of the disbursement in the hands of the employer.⁸ Among the various methods, the payroll tax reduction or exemption is the most desirable; it is superior to the income tax credit because it does not disqualify employers who incur losses from receiving the subsidy, and it is both more visible to potential users and easier to administer (through the existing tax enforcement mechanism, obviating the establishment of a separate administrative body) than a system of cash grants.

Whereas France’s Incentive Bonus and Britain’s Temporary Employment Subsidy are specified as a flat amount per full-time worker over a given period of employment, the other subsidies are defined as a percentage of wage payments. Thus, the former are biased in favor of low-wage occupational categories, while the latter are neutral across occupations (although the U.S. New Jobs Tax Credit is biased in favor of low-wage skills and small enterprises as a result of the ceilings on the amount of the credit per employer and per worker). However, the actual choice of a base to calculate the subsidy (in terms of worker, time worked, or percentage of wages) depends not only on the desired patterns of income distribution and resource allocation but also on administrative considerations (such as the availability of information on the employer’s work force in compliance with reporting requirements—for example, for social security records).

In relation to the gross hourly compensation per eligible employee, the subsidies (spread over a full year) confer benefits ranging from 7 per cent of the wage cost to French employers (recipients of the Incentive Bonus) to 32 per cent of the wage cost to British employers, as shown in Table 2.⁹ The maximum duration of the payments to eligible firms varies between two and eight quarters. It is difficult to judge a priori the adequacy of the magnitude and duration of the subsidy flow. More generally, however, subsidies are to be set on the basis of existing labor market conditions in a particular country or location. In other words, the appropriate size and length of payments depend on the unemployment rate at the going wage rate (determined in part by minimum wage legislation and collective bargaining), as well as on the firing and hiring costs and the resulting inertia of employers in laying off or hiring workers (that is, their propensities to hoard and dishoard labor) in response to cyclical variations in output demand.

Table 2.

Relation of Subsidy to Hourly Compensation in Manufacturing

Sources: U. S. Department of Labor, Bureau of Labor Statistics, and Table 1.

^¹Estimated 1976 average compensation per hour worked. Includes supplementary benefits (family allowances, payments in kind, severance pay, and other bonuses), payroll taxes, and recruiting and training costs.

^²Estimated maximum subsidy per hour worked, on an annual basis, assuming full-time 40-hour week employment.

^³Amount is twice as large if computed over the actual duration of the subsidy—that is, on a semiannual basis.

^⁴Subsidy can be extended up to two additional quarters at one half of the normal rate.

Table 2.

Relation of Subsidy to Hourly Compensation in Manufacturing

Country and Subsidy		Hourly Compensation Per Employee¹	Hourly Subsidy Per Eligible Employee²	Subsidy-Compensation Ratio	Maximum Duration of Subsidy
France		national currency units		per cent	number of quarters
	Incentive Bonus for Job Creation	22.47	1.60³	7.1³	2
	Social Security Tax Exemption	22.47	4.68	20.8	8
Germany, Fed. Rep.
	Wage Cost Subsidy	16.74	3.44³	20.5³	2
United Kingdom
	Temporary Employment Subsidy	1.72	0.55	32.0	4⁴
United States
	New Jobs Tax Credit	6.87	1.12	16.3	4

Sources: U. S. Department of Labor, Bureau of Labor Statistics, and Table 1.

^²Estimated maximum subsidy per hour worked, on an annual basis, assuming full-time 40-hour week employment.

^³Amount is twice as large if computed over the actual duration of the subsidy—that is, on a semiannual basis.

^⁴Subsidy can be extended up to two additional quarters at one half of the normal rate.

Table 2.

Relation of Subsidy to Hourly Compensation in Manufacturing

Country and Subsidy		Hourly Compensation Per Employee¹	Hourly Subsidy Per Eligible Employee²	Subsidy-Compensation Ratio	Maximum Duration of Subsidy
France		national currency units		per cent	number of quarters
	Incentive Bonus for Job Creation	22.47	1.60³	7.1³	2
	Social Security Tax Exemption	22.47	4.68	20.8	8
Germany, Fed. Rep.
	Wage Cost Subsidy	16.74	3.44³	20.5³	2
United Kingdom
	Temporary Employment Subsidy	1.72	0.55	32.0	4⁴
United States
	New Jobs Tax Credit	6.87	1.12	16.3	4

Sources: U. S. Department of Labor, Bureau of Labor Statistics, and Table 1.

^²Estimated maximum subsidy per hour worked, on an annual basis, assuming full-time 40-hour week employment.

^³Amount is twice as large if computed over the actual duration of the subsidy—that is, on a semiannual basis.

^⁴Subsidy can be extended up to two additional quarters at one half of the normal rate.

A critical element in the success of a wage subsidy, expressed in simplest terms by the government’s net revenue loss per job created, is the definition of the target population. Ideally, to maximize the wage subsidy’s beneficial impact thus measured, the subsidy must be applied solely to the employment of (1) workers who would not be hired in the absence of the subsidy, and (2) workers who would be fired in the absence thereof—each criterion being necessary in a different phase of the business cycle. Obversely, under criterion (1), employers should be prevented from receiving the subsidy for the following purposes: (A) to substitute subsidized workers for their existing work force, (B) to hire workers who would be hired anyway, (C) to hire workers who are already employed elsewhere in the economy; and, under criterion (2), they should be prevented from receiving the subsidy (D) to retain workers whom they would retain in their work force anyway.

To the extent that a subsidy satisfies only criterion (1) or (2), it is not likely to promote incremental employment during a decline or a recovery in economic activity, respectively. By the same token, a subsidy devoid of safeguards against its use for purposes (A) through (D) results in a windfall to employers and a loss to the rest of society. Interestingly, a general subsidy can fulfill both criteria, although without including any safeguards, whereas a marginal subsidy usually can be aimed at one criterion alone and yet contain reasonable safeguards. In sum, it does not seem feasible to design a perfect subsidy, consistent with both criteria and embodying all safeguards.

The inherent asymmetry of marginal wage subsidies, and the partial remedy that they may provide for unemployment, are illustrated by the measures under scrutiny. On the one hand, schemes introduced in the Federal Republic of Germany, France, and the United States (based on the optimistic presumption that the recession has come to an end) are intended to encourage additions to employment, in accordance with criterion (1)—although during a mild downturn in economic activity such subsidies may conceivably meet criterion (2) as well.¹⁰ These subsidies seek to avoid windfalls from (A) by establishing a base level of employment (set at the level prevailing immediately prior to the promulgation of the subsidy)¹¹ that the employer must exceed in order to receive the subsidy. In addition, both French schemes and the American tax credit prescribe a variable base level (variable either automatically on an annual basis or, in the case of the Incentive Bonus, on an ad hoc basis) that adjusts upward in the event of a recovery, to prevent use of the subsidy for (B). An added advantage of the variable base level is that, through a downward adjustment, it can trigger the subsidy even before reaching the end of a recession. Further, as a safeguard against (C), both the Incentive Bonus, in its initial form, and the Wage Cost Subsidy require a worker to have been continuously unemployed for a specified period (three and six months, respectively) prior to being eligible for the subsidy.¹²

On the other hand, the British Temporary Employment Subsidy (based on the pessimistic presumption of a deepening recession) attempts to discourage diminutions in employment, in line with criterion (2). Yet, unlike the other subsidy programs patterned in conformity with criterion (1) that apply safeguards through objective tests of eligibility, the Temporary Employment Subsidy leaves the screening of recipients almost entirely to the discretion of interested employers, labor unions, and program administrators, in order to avoid (D). This discretionary element raises serious questions as to the effectiveness of the British scheme; more generally, the lack of a viable alternative¹³ casts doubt on any attempt to curtail with a wage subsidy an upsurge in unemployment caused by a sharp decline in aggregate demand.

Therefore, whereas it seems necessary for practical reasons to reject temporary marginal wage subsidies directed at discouraging a reduction in employment, it is clearly desirable that subsidies aimed at raising employment incorporate certain basic features—namely, a variable base level of employment and a minimum waiting period—in their definition of the target population. However, just as with the amount and duration of the subsidy, it is difficult to determine a priori the appropriate variation of the base level and the optimal length of the waiting period (or additional categorical requirements), as these are to be calibrated to prevailing labor market conditions, and thus may require considerable fine-tuning by policymakers.

Of the wage subsidies examined, France’s Incentive Bonus for Job Creation emerges as the logical candidate for ex post empirical evaluation because of its near-universal application to the unemployed (from June through November 1975) and the availability of quantitative data for the relevant period. None of the other measures are amenable to a comparable investigation. The coverage of these subsidies is either heavily constrained by special categorical tests or subject to discretionary interpretation (as the British grant), which is almost impossible to take into account adequately in a quantitative measurement of a subsidy’s effect. Thus, the remainder to the paper is devoted primarily to an analysis of the impact of the Incentive Bonus on the level of French employment. But as a prelude to that analysis, it is necessary to discuss in general terms the effects of a wage subsidy.

II. Framework for Analysis

1. economic effects of a wage subsidy

The economic consequences of a wage subsidy can be grouped under four types of effects. Two of them, the factor substitution and scale effects, are first-order microeconomic effects experienced directly by the subsidized firm. The factor substitution effect indicates the rise in employment and the decline in the use of other factor inputs in response to a reduction in wage cost by the amount of the subsidy, which is contingent on the wage elasticity of demand for labor (as determined by the elasticity of substitution between labor and other factors) and on the wage elasticity of supply of labor. The higher the absolute value of the elasticities, the larger will be the increase in employment (and the larger will be the decline in the use of other inputs); the lower it is, the larger will be the rise in the wage rate.

The scale effect consists of the rise in employment (and in the use of other factors) that accompanies the expansion in output brought about by the reduced wage cost. To the extent that the firm shifts the subsidy to the consumer in the form of lower product prices, there will be a growth in output demand; this, in turn, will engender increased derived demand for all inputs, including labor. Thus, the scale effect depends on the price elasticity of demand for the product, and the elasticity of demand for inputs with respect to output (i.e., the inverse of the degree of homogeneity of the production function), constrained by the supply elasticities of factor inputs. Again, the higher the absolute value of the elasticities, the larger will be the increment in factor use, including employment; the lower it is, the larger will be the pressure on factor prices.

In addition to these direct effects, indirect repercussions are felt throughout the economy—interindustry effects and multiplier effects. Interindustry effects measure changes in relative prices and in quantities of products and factor inputs in different industries (including feedbacks on those of the subsidized firm or industry) resulting from the initial substitution and scale effects. The magnitude and direction of these repercussions depend on the interindustry relationships (i.e., the degree of complementarity and substitutability among products and among factors, and their relative proportions in consumption and production) within, and the openness of, the economy. Thus, in contrast to the direct substitution and scale effects, the interindustry effects on output and factor inputs and their relative prices cannot be predicted unambiguously without knowledge of the technological relationships in production and of taste patterns in consumption. With respect to labor, however, it can be said that such effects will tend to reinforce the increase in employment and wages (depending on the unemployment rate and the labor participation response) mentioned earlier.

While the above effects originate on the supply side, the multiplier effects originate on the demand side. The latter effects comprise the macroeconomic consequences of the subsidy through successive rounds of expansion in aggregate demand on the strength of a rise in: the disposable income of households (generated by the increment in employment and the wage rise owing to the subsidy, net of the foregone unemployment compensation received prior to the subsidy), the after-tax earnings of firms (to the extent that the subsidy is not shifted to workers in the form of higher wages and/or to consumers in the form of lower prices), and the government’s deficit (given by the subsidy payments less the automatic increase in tax receipts and reduction in unemployment compensation payments). The resulting multiplier effects on the level of output, employment, investment, and prices depend not only on the technological relationships, supply constraints, and consumer preferences outlined above but also on the marginal propensities to spend of the various sectors, as well as on the built-in elasticities of the tax and unemployment compensation systems. Although the effects on output, employment, investment, and factor prices should be positive with any set of realistic parameter values, the general price level may or may not decline, depending on the slack in capacity utilization and the means of financing the budgetary deficit.

Obviously, the cumulative impact of a wage subsidy is contingent on the characteristics discussed in the previous section. As against a general wage subsidy, which would be fully reflected in all the enumerated effects, a temporary marginal wage subsidy would be felt appreciably through only some of these effects. Specifically, assuming that the marginal subsidy is well designed, in the sense that it meets at least criterion (1) and contains reasonable safeguards against (A) through (C), it will lead (in the absence of a sharp drop in effective demand), through the substitution effect, to a rise in employment in the short run and (upon approaching full employment) to higher wages in the long run,¹⁴ with minor scale, interindustry, and multiplier effects.¹⁵ Otherwise, without appropriate safeguards, the subsidy will result chiefly in a windfall for subsidized firms and in a budgetary deficit with expansionary multiplier effects.

2. summary of the literature

In his seminal contribution on wage subsidies, Kaldor (1936) focused on their substitution and scale effects on employment and on their budgetary cost. In comparing marginal and general wage subsidies, he concluded that the former is a more appropriate tool to fight cyclical unemployment, though it might entail a larger net revenue cost to the government than the latter; he indicated that the best manner of implementing either subsidy would be through a reduction in payroll taxes. Since the early 1960s, a number of authors have discussed the use of wage subsidies as an alternative to other policy tools (such as tariff protection, output or capital subsidies) and as a cure for regional or structural unemployment in developed and developing countries.¹⁶ However, Weiner and others (1969) provided a rigorous theoretical treatment of the substitution and scale effects of a wage subsidy in a simple one-sector model, whereas Ahluwalia (1973) and Mieszkowski (1974) also investigated interindustry effects in two-sector models. The multiplier effects of wage subsidies were traced in the framework of full macroeconomic models¹⁷ of a closed economy by Fethke and Williamson (1976) and of an open economy under flexible exchange rates by Argy and Salop (1977).

On an empirical level, following the first quantitative estimate of a hypothetical cut in payroll taxes by Frisch (1949) in the context of an early model of the Norwegian economy, most simulations of the impact of wage subsidies have been ex ante measurements of their substitution effect on employment, income, and government expenditure, performed on U.S. data. Barth (1972) estimated the impact of a suggested universal subsidy paid to workers, assuming a wide range of wage elasticities of demand for, and supply of, labor. Biederman (1972) quantified the consequences of an employment-training income tax credit under a unitary elasticity of demand and an infinite elasticity of supply. Somewhat more realistically, Greenston and MacRae (1975 b) simulated the employment impact of the U.S. Work Incentive Tax Credit (a categorical subsidy applied to welfare recipients) on the basis of a full labor market model developed by Crandall and others (1975).¹⁸

More recently, Kesselman and others (1977) estimated elasticities of substitution among three factors of production from a translog cost function that, along with assumed infinitely elastic factor supplies, were used to calculate the rise in employment attributable to general and marginal wage subsidies proposed in the form of income tax credits. Further, Hamermesh (1976 and 1977) calculated both the substitution and scale effects of several general wage subsidy options on employment, using, first, typical parameter estimates based on a number of econometric studies of factor demand and production functions and, second, his own estimates of a quarterly labor demand function. Also incorporating parameter values from other studies in their economy-wide model, Fethke and Williamson (1976 and 1977) measured the multiplier effects of a hypothetical tax credit with a variable base level.

Among these works, only the most recent ones contain results that may be directly relevant to our inquiry. Specifically, Kesselman and others (1977) found that a subsidy that lowered the marginal cost of labor by 1 per cent would lead to an increase of about 0.2 per cent in the demand for blue-collar labor, a decline of nearly 0.1 per cent in the demand for white-collar labor, and a drop of 0.5 per cent in the demand for capital—assuming that the level of output was kept constant. This outcome is explained by the complementarity between white-collar labor and capital, and by the substitutability between blue-collar labor and any other factor input. For his policy simulations, Hamermesh (1976 and 1977) adopted a four-quarter wage elasticity of employment (reflecting substitution and scale effects) ranging between -0.1 and -0.6. According to the revised Fethke and Williamson (1977) model,¹⁹ a 1 per cent marginal wage subsidy would produce a 0.3 per cent rise in employment, a 0.2 per cent drop in the price level, and a 0.2 per cent increase in real wages (upon full adjustment to the subsidy). Interestingly, the impact of a 1 per cent general wage subsidy would depend on the method of financing it: there would be a 0.2 per cent increase in employment, a 0.6 per cent reduction in prices, and a 0.4 per cent boost in real wages, if the subsidy were accompanied by an equivalent reduction in other government expenditures; or, alternatively, there would be a 0.4 per cent rise in employment, a 0.8 per cent increase in prices, and a 0.2 per cent decline in real wages, if there were no offsetting discretionary changes in taxation or expenditures.

III. The French Experience

1. determinants of employment behavior

In order to ascertain the employment effect of a wage subsidy, our initial task is to identify the overall determination of employment behavior. Much of the literature on the determinants of employment is predicated on the relationship between the demand for labor services by profit-maximizing firms and the supply of such services by utility-maximizing households.²⁰ Notwithstanding the merits of a fully specified labor market (and of allowing for interactions with the goods market and the money market), especially for capturing long-run behavior, the model formulated here is a partial-equilibrium short-run one with emphasis on labor demand.²¹ This approach is justified by the particular policy orientation of our investigation, on the one hand, and is dictated by data limitations, on the other.

For the aggregate of firms in a given industry, facing perfectly competitive markets, profit maximization leads to the well-known marginal productivity condition for labor input:²²

\begin{matrix} \frac{\partial Q}{\partial L} = w & (1) \end{matrix}

where Q denotes net output originating in the industry, L denotes labor services, and w denotes the wage rate (all in real terms). Further, the marginal product of labor is contingent on the industry’s production function. Assuming constant returns to scale, constant elasticity of substitution (between capital and labor), and embodied technological change, the level of output is determined as follows:

\begin{matrix} Q = [δ_{1} (e^{γ t} L)^{(σ - 1) / σ} + δ_{2} (e^{ϕ t} K)^{(σ - 1) / σ}]^{σ / (σ - 1)} & (2) \end{matrix}

where, besides the variables already defined, K denotes capital services, δ is a distribution parameter, γ and ϕ denote the respective rates of technological change embodied in labor and capital, σ denotes the elasticity of substitution, and t denotes time.

Differentiation of equation (2) with respect to labor, and substitution of the partial derivative into (1), yields

\begin{matrix} δ_{1} e^{- γ t (1 - σ) / σ} L^{- 1 / σ} Q^{1 / σ} = w & (3) \end{matrix}

in equilibrium. By solving for L, equation (3) can be converted into the stochastic relationship

\begin{matrix} L_{t} = δ_{1}^{σ} e^{- γ t (1 - σ)} Q_{t}^{*} w_{t}^{* - σ} e^{η_{t}} & (4) \end{matrix}

which indicates that the employment of labor input in period t depends on the expected levels (denoted by asterisks) of output and wages and of the error term η. There are several reasons why employment may not respond instantaneously and precisely to the current level of exogenous variables, the main ones being costs of hiring and firing employees and imperfect managerial knowledge. Hence, we may postulate a mechanism of expectations, in which the expected level of each variable is a function of the distributed lag of its preceding actual levels:

\begin{matrix} Q_{t}^{*} = Π_{i = 0}^{\infty} Q_{t - i}^{α_{i}} & (5) \end{matrix}

\begin{matrix} w_{t}^{*} = Π_{i = 0}^{\infty} w_{t - i}^{β_{i}} & (6) \end{matrix}

where α_i ≥ 0 and β_i ≥ 0 are weights subject to the condition that

Σ_{i = 0}^{\infty} α_{i} = Σ_{i = 0}^{\infty} β_{i} = 1

Given equations (5) and (6), equation (4) can be expressed in logarithmic notation

\begin{matrix} \ln L_{t} = σ \ln δ_{1} - γ (1 - σ) t + Σ_{i = 0}^{\infty} α_{i} \ln Q_{t - i} - σ Σ_{i = 0}^{\infty} β_{i} \ln w_{t - i} + η_{t} & (7) \end{matrix}

Of major interest from the policy perspective is the definition of the real cost of labor services, as perceived by the firm. Ordinarily, the average real wage rate for the employer is defined as

\begin{matrix} w = \frac{v (1 + y)}{p} & (8) \end{matrix}

where v denotes the money wage paid to the employee per unit of time, y the rate of payroll taxes (contributions to social security and other funds), and p the price of output. However, the net wage cost under a wage subsidy is reduced to ²³

\begin{matrix} w^{'} = \frac{v (1 + y) - s}{p} & (9) \end{matrix}

which contains s, the subsidy per unit of time—subject to the firm’s income tax. This formula can accommodate alternative types of wage subsidies as well. For example, in contrast to equation (9), which applies under the French Incentive Bonus, a subsidy computed as a percentage of the basic wage and exempted from income tax (or without reducing the wage deduction from the tax base) would result in

\begin{matrix} w^{''} = \frac{v (1 + y)}{p} - \frac{s v}{p (1 - u)} & (10) \end{matrix}

where u denotes the company income tax rate.

2. estimation

For empirical estimation, terms are rearranged in equation (7) to obtain each industry’s labor input function over quarterly observations t = 1, 2, …, n,

\begin{matrix} \ln (L_{t} / Q_{t}) = λ_{0} + λ_{1} t + λ_{2} Δ \ln Q_{t} + λ_{3} \ln w_{t - j} + λ_{4} Δ \ln w_{t - j} + λ_{5} Δ \ln w_{t - j - 1} + λ_{6} Δ \ln w_{t - j - 2} + η_{t} & (11) \end{matrix}

where it is hypothesized that the employment of labor input (normalized by the current level of output) adjusts within two quarters to changes in output,²⁴ and within one year to changes in the wage rate.²⁵ The actual effect of exogenous variables is measured by the λ coefficients, from which the structural parameters can be derived in the following manner:

\begin{array}{l} λ_{0} = σ \ln δ_{1} \\ λ_{1} = - γ (1 - σ) \\ λ_{2} = α_{1} = 1 - α_{0} \\ λ_{3} = - σ \end{array}

The meaning of λ₄, λ₅, and λ₆ depends on the value of j (i.e., j = 0, 1, 2, or 3) that fulfills the conditions underlying equations (5) and (6). For example, if j = 0 because of prompt adjustment, then

\begin{array}{l} λ_{4} = σ (β_{1} + β_{2} + β_{3}) = σ (1 - β_{0}) \\ λ_{5} = σ (β_{2} + β_{3}) \\ λ_{6} = σ β_{3} \end{array}

With slower adjustment, if j = 1, then

\begin{array}{l} λ_{4} = σ (β_{2} + β_{3}) = σ (1 - β_{1}) \\ λ_{5} = σ β_{3} \\ λ_{6} = 0 \end{array}

If j = 2, then

\begin{array}{l} λ_{4} = σ β_{3} = σ (1 - β_{2}) \\ λ_{5} = λ_{6} = 0 \end{array}

or if j = 3, then λ₄, λ₅, and λ₆ vanish.²⁶

The data used to estimate equation (11), compiled by the Institut National de la Statistique et des Etudes Economiques (INSEE),²⁷ consist of seasonally adjusted quarterly series corresponding to France’s eight major nonfinancial nonfarm industrial branches from the first quarter of 1959 through the second quarter of 1975—that is, the period preceding the enactment of the Incentive Bonus. The equation was fitted for each industry on two alternative dependent variables: number of man-hours and number of employees. While the former is the appropriate definition of labor as a factor of production, the latter is the relevant measure for evaluating the effectiveness of the subsidy (the objective of which is to generate employment). Both sets of results are reported, but no attempt is made at a rigorous reconciliation between the two, with a separate explanation for hours worked per worker²⁸—a task that lies beyond the scope of our analysis, given the lack of data on certain key variables.

Ordinary least-squares regression revealed the presence of higher-order autocorrelation that was subsequently corrected with the Cochrane-Orcutt approach.²⁹ The results are presented in “unscrambled” form, so that they refer to the original equation, except for the Durbin-Watson statistic, which was computed on the residuals of the transformed equation. Further, each regression has been run stepwise; in successive rounds, terms were discarded that violated the aforesaid constraints on α and β or whose coefficients were smaller than their respective standard errors. As a final methodological point, two dummy variables that account for extraordinary historical events were included in the estimated equation.³⁰ Since they are devoid of analytical meaning, they are not listed along with the other regression coefficients.

Tables 3 and 4 show excellent fits and satisfactory correction for autocorrelation for all industrial activities. The independent variables display the expected signs, except the time trend, which in one regression has a positive coefficient. However, Tables 5 and 6 are more informative about the role of each variable in explaining employment. On the whole, especially as summarized in the bottom line (namely, the industry-weighted average of each parameter at the end point of the sample) of each table, the structural parameter estimates provide ample support for the theoretical model.

Table 3.

Man-hours Equation: Regression Coefficients¹

^¹The figures in parentheses are the standard errors of estimate of the relevant coefficients. The double asterisk (**) denotes statistical significance at the 1 per cent level. The single asterisk (*) denotes statistical significance at the 5 per cent level.

^² $\bar{S E E}$ and ${\bar{R}}^{2}$ are, respectively, the standard error of estimate and the coefficient of determination, corrected for loss in degrees of freedom, and D-W is the Durbin-Watson statistic.

Table 3.

Man-hours Equation: Regression Coefficients¹

	Independent Variables									Autoregressive Terms			Summary Statistics²
Industry	Constant	t	ΔIn Q_t	In w_t	In w_t-1	In w_t-2	ΔIn w_t	ΔIn w_t-1	ΔIn w_t-2	ρ₁	ρ₂	ρ₃	$\bar{S E E}$	${\bar{R}}^{2}$	D-W
Food and kindred products	4.651**	-0.006**	-0.495**	-0.343**			0.177**			1.058**	-0.701**	0.488**	0.015	0.994	1.784
	(0.140)	(0.001)	(0.030)	(0.096)			(0.056)			(0.106)	(0.144)	(0.105)
Fuels and lubricants	4.541**	-0.012**	-0.502**	-0.436**			0.242**			1.357**	-0.415**		0.019	0.998	1.838
	(0.221)	(0.003)	(0.033)	(0.242)			(0.070)			(0.116)	(0.115)
Machinery and primary metals	5.588**	-0.012**	-0.516**			-0.324**			0.105	1.145**	-0.230		0.014	0.998	1.941
	(0.170)	(0.002)	(0.032)			(0.107)			(0.063)	(0.121)	(0.122)
Intermediate goods	4.839**	-0.009**	-0.287**			-0.359**			0.121	1.075**	-0.408**		0.015	0.996	1.819
	(0.168)	(0.002)	(0.063)			(0.112)			(0.084)	(0.129)	(0.130)
Consumer goods	5.971**	-0.004**	-0.382**	-0.678**			0.331**			1.142**	-0.616**	0.243	0.013	0.997	1.925
	(0.114)	(0.001)	(0.045)	(0.084)			(0.068)			(0.126)	(0.177)	(0.127)
Construction and public works	5.173**	-0.010**	-0.398**	-0.220*			0.084			1.338**	-0.880**	0.429**	0.010	0.998	1.710
	(0.117)	(0.001)	(0.051)	(0.085)			(0.053)			(0.108)	(0.160)	(0.099)
Nonfinancial services	4.622**	-0.005**	-0.504**	-0.181*			0.068			1.021**	-0.409**		0.012	0.989	1.803
	(0.108)	(0.000)	(0.030)	(0.069)			(0.055)			(0.117)	(0.115)
Trade	4.819**	-0.000	-0.513**		-0.397**			0.194**		1.210**	-0.396**		0.006	0.997	1.863
	(0.149)	(0.001)	(0.040)		(0.103)			(0.069)		(0.115)	(0.112)

Table 3.

Man-hours Equation: Regression Coefficients¹

	Independent Variables									Autoregressive Terms			Summary Statistics²
Industry	Constant	t	ΔIn Q_t	In w_t	In w_t-1	In w_t-2	ΔIn w_t	ΔIn w_t-1	ΔIn w_t-2	ρ₁	ρ₂	ρ₃	$\bar{S E E}$	${\bar{R}}^{2}$	D-W
Food and kindred products	4.651**	-0.006**	-0.495**	-0.343**			0.177**			1.058**	-0.701**	0.488**	0.015	0.994	1.784
	(0.140)	(0.001)	(0.030)	(0.096)			(0.056)			(0.106)	(0.144)	(0.105)
Fuels and lubricants	4.541**	-0.012**	-0.502**	-0.436**			0.242**			1.357**	-0.415**		0.019	0.998	1.838
	(0.221)	(0.003)	(0.033)	(0.242)			(0.070)			(0.116)	(0.115)
Machinery and primary metals	5.588**	-0.012**	-0.516**			-0.324**			0.105	1.145**	-0.230		0.014	0.998	1.941
	(0.170)	(0.002)	(0.032)			(0.107)			(0.063)	(0.121)	(0.122)
Intermediate goods	4.839**	-0.009**	-0.287**			-0.359**			0.121	1.075**	-0.408**		0.015	0.996	1.819
	(0.168)	(0.002)	(0.063)			(0.112)			(0.084)	(0.129)	(0.130)
Consumer goods	5.971**	-0.004**	-0.382**	-0.678**			0.331**			1.142**	-0.616**	0.243	0.013	0.997	1.925
	(0.114)	(0.001)	(0.045)	(0.084)			(0.068)			(0.126)	(0.177)	(0.127)
Construction and public works	5.173**	-0.010**	-0.398**	-0.220*			0.084			1.338**	-0.880**	0.429**	0.010	0.998	1.710
	(0.117)	(0.001)	(0.051)	(0.085)			(0.053)			(0.108)	(0.160)	(0.099)
Nonfinancial services	4.622**	-0.005**	-0.504**	-0.181*			0.068			1.021**	-0.409**		0.012	0.989	1.803
	(0.108)	(0.000)	(0.030)	(0.069)			(0.055)			(0.117)	(0.115)
Trade	4.819**	-0.000	-0.513**		-0.397**			0.194**		1.210**	-0.396**		0.006	0.997	1.863
	(0.149)	(0.001)	(0.040)		(0.103)			(0.069)		(0.115)	(0.112)

Table 4.

Employees Equation: Regression Coefficients¹

Table 4.

Employees Equation: Regression Coefficients¹

	Independent Variables									Autoregressive Terms			Summary Statistics²
Industry	Constant	t	ΔIn Q_t	In w_t	In w_t-1	In w_t-2	ΔIn w_t	ΔIn w_t-1	ΔIn w_t-2	ρ₁	ρ₂	ρ₃	$\bar{S E E}$	${\bar{R}}^{2}$	D-W
Food and kindred products	-1.792**	-0.004**	-0.499**	-0.359**			0.195**			1.098**	-0.728**	0.530**	0.014	0.993	1.759
	(0.146)	(0.002)	(0.028)	(0.095)			(0.054)			(0.108)	(0.150)	(0.107)
Fuels and lubricants	-1.912**	-0.01**	-0.496**	-0.337**			0.212			1.336**	-0.418**		0.020	0.997	1.830
	(0.215)	(0.003)	(0.035)	(0.125)			(0.074)			(0.118)	(0.118)
Machinery and primary metals	-0.920**	-0.006	-0.518**			-0.370**			0.123	1.182**	-0.225		0.015	0.997	1.969
	(0.208)	(0.003)	(0.033)			(0.109)			(0.063)	(0.120)	(0.115)
Intermediate goods	-1.179**	-0.003*	-0.311**		-0.638**			0.619**	0.186*	0.985**	-0.676**		0.015	0.996	1.926
	(0.127)	(0.001)	(0.062)		(0.085)			(0.103)	(0.083)	(0.117)	(0.120)		0.015	0.996	1.926
Consumer goods	-0.313*	-0.002	-0.383**	-0.727**			0.361**			1.279**	-0.670**	0.229	0.014	0.996	1.937
	(0.129)	(0.001)	(0.046)	(0.094)			(0.071)			(0.126)	(0.188)	(0.122)
Construction and public works	-1.340**	-0.008**	-0.369**	-0.223**			0.095*			1.171**	-0.767**	0.360**	0.009	0.998	1.739
	(0.094)	(0.001)	(0.050)	(0.069)			(0.046)			(0.115)	(0.151)	(0.110)
Nonfinancial services	-1.944**	-0.004**	-0.498**	-0.082						1.016**	-0.302*		0.013	0.976	1.832
	(0.103)	(0.000)	(0.034)	(0.066)						(0.121)	(0.116)
Trade	-1.372**	0.002*	-0.511**		-0.534**			0.271**		1.083**	-0.397**		0.005	0.997	1.831
	(0.105)	(0.001)	(0.038)		(0.073)			(0.055)		(0.114)	(0.097)

Table 4.

Employees Equation: Regression Coefficients¹

	Independent Variables									Autoregressive Terms			Summary Statistics²
Industry	Constant	t	ΔIn Q_t	In w_t	In w_t-1	In w_t-2	ΔIn w_t	ΔIn w_t-1	ΔIn w_t-2	ρ₁	ρ₂	ρ₃	$\bar{S E E}$	${\bar{R}}^{2}$	D-W
Food and kindred products	-1.792**	-0.004**	-0.499**	-0.359**			0.195**			1.098**	-0.728**	0.530**	0.014	0.993	1.759
	(0.146)	(0.002)	(0.028)	(0.095)			(0.054)			(0.108)	(0.150)	(0.107)
Fuels and lubricants	-1.912**	-0.01**	-0.496**	-0.337**			0.212			1.336**	-0.418**		0.020	0.997	1.830
	(0.215)	(0.003)	(0.035)	(0.125)			(0.074)			(0.118)	(0.118)
Machinery and primary metals	-0.920**	-0.006	-0.518**			-0.370**			0.123	1.182**	-0.225		0.015	0.997	1.969
	(0.208)	(0.003)	(0.033)			(0.109)			(0.063)	(0.120)	(0.115)
Intermediate goods	-1.179**	-0.003*	-0.311**		-0.638**			0.619**	0.186*	0.985**	-0.676**		0.015	0.996	1.926
	(0.127)	(0.001)	(0.062)		(0.085)			(0.103)	(0.083)	(0.117)	(0.120)		0.015	0.996	1.926
Consumer goods	-0.313*	-0.002	-0.383**	-0.727**			0.361**			1.279**	-0.670**	0.229	0.014	0.996	1.937
	(0.129)	(0.001)	(0.046)	(0.094)			(0.071)			(0.126)	(0.188)	(0.122)
Construction and public works	-1.340**	-0.008**	-0.369**	-0.223**			0.095*			1.171**	-0.767**	0.360**	0.009	0.998	1.739
	(0.094)	(0.001)	(0.050)	(0.069)			(0.046)			(0.115)	(0.151)	(0.110)
Nonfinancial services	-1.944**	-0.004**	-0.498**	-0.082						1.016**	-0.302*		0.013	0.976	1.832
	(0.103)	(0.000)	(0.034)	(0.066)						(0.121)	(0.116)
Trade	-1.372**	0.002*	-0.511**		-0.534**			0.271**		1.083**	-0.397**		0.005	0.997	1.831
	(0.105)	(0.001)	(0.038)		(0.073)			(0.055)		(0.114)	(0.097)

Table 5.

Man-hours Equation: Structural Coefficients