Fighting Long-term Unemployment with Targeted Employment Subsidies: Benefit Transfer Programme (BTP) versus Targeted Negative Income Tax (TNIT) / Die Bekämpfung der Langzeitarbeitslosigkeit durch zielgruppenorientierte Lohnsubventionen: Benefit Transfer Programme (BTP) versus „Einstiegsgeld“ für Langzeitarbeitslose im Vergleich

Abstract

Summary An important feature of the European unemployment problem is the disincentive to supply labour for low-productivity workers due to generous levels of non-labour income in conjunction with marginal effective tax rates of around 100 % for low levels of income (poverty trap). Targeted employment subsidies are proposed to overcome this problem. Snower (1994, 1997) suggests a targeted employer subsidy scheme called “Benefit Transfer Programme (BTP)”. Jerger/ Spermann (1997) suggest a targeted employee subsidy scheme called “Targeted Negative Income Tax (TNIT)”. Both proposals solve the poverty trap problem for a limited time period without additional fiscal costs. In this paper, the employment effects of BTP and TNIT are compared in an extended model of equilibrium unemployment. It turns out that TNIT may in practice be associated with higher employment effects than BTP due to the role of transaction costs and asymmetric information.