Krugman on Jobs Subsidies and Protection

As an on-the-record sceptic about job subsidy policies, I found this piece by Paul Krugman interesting. In addition to being in favour of employment subsidy schemes, Krugman also discusses the benefits of employment protection legislation, which I would admit to being even more sceptical of (memories of the phrase Eurosclerosis come to mind). At this point, I’d stick to me original opinions on this issue but I’ll happily admit that Krugman is umpteeen times smarter than me.

Of course, when dealing with these issues in an Irish context, there are practical implementation issues to be dealt with. What I’ve heard so far about the employment subsidy scheme suggests that it’s exactly the kind of bureacratic mess that I expected it would be when it was announced.

37 replies on “Krugman on Jobs Subsidies and Protection”

Ascertain the appropriate amount for a tax credit and use a positive tax payment system for everybody present in the state.

Pay them their tax credit monthly. Tax them on all earnings at whatever is the rate of tax. They have received their tax credit as a cash payment.

No social welfare “system” is required. All public sector employees from social welfare work for Revenue until “wastage” reduces numbers so that recruitment is necessary.

Big savings?

Krugman is not so smart ……

The trouble with Krugman’s blogging is that it can be uneven. And very, very political. he is not afraid of seizing on flimsy evidence if it supports his ‘liberal’ agenda. Given the virulent and attack-dog nature of the debate in the US, Krugman has made a conscious decision to fight fire with fire. He himself has acknowledged this. Not an unreasonable position one might think. If you play the game, play by the rules, even if they are tough.
But sometimes this approach can lead you up the garden path. Just like an amateur golfer who takes great joy in watching Tiger Woods fluff a shot, we can look at Krugman and chuckle when he gets it wrong. The German labour market as a model for the rest of us? Gimme a break.

Oh forget Krugman for God sake. The Irish labour market, particularly at the younger and less skilled end, looks all set to be stuck in a moment that it can’t get out of. Waiting for the macroeconomy to lift this particular boat seems an especially inadequate response.
As Colm Harmon pointed out before, the literature on Active Labour Market Policies doesn’t provide much comfort – deadweight losses, small effect sizes etc- but thats relative to a fairly normal labour market: thats not where we are.

Critical point to the Krugman piece is that he is saying that this is not a normal labour market so we don’t need to debate it that way (the dig
at Summers for example). I don’t like ALMPs one bit – perhaps with exception of jobsearch Programmes like those evaluated
by Donal O’Neill and others and are very much stick as opposed to carrot (i.e. as much about welfare fraud as back to work) they are fraught with problems. But I do think we need to put a floor under youth (which means 30ish) unemployment.
IBEC are innovating with an interns initiative and more power to them. More
can be done and some of the weirdness of the existing schemes can be dealt with (one former student of mine almost went back to education to do a Masters in Economics when he already had one! The scheme did not include PhD training for example). It is not forever – and you will not show short term gains that could pass muster with the likes of me in an academic paper on cost benefits. But that does not stop the early
education lobby from shouting about the 10/15/17 to 1 returns on investment there when all the evidence is that it is over a very long time that these
returns get generated. The same needs to be pointed out with this debate – Blanchflower might have annoyed some last week at his talk but his killer slide was the one showing the cohort size – replacement ratios will collapse here and if the current 18 to 30 cohort lose 20% of lifetime
income, or leave, the public finance implications are considerable.

@Colm and Kevin: I think we need a lot more discussion about micro programmes of various sorts, their effectiveness, and also their net budgetary cost. If you come at unemployment from a macro perspective, as most contributors to this blog do, then the outlook seems pretty bleak. We don’t have monetary sovereignty anymore, and as a result of the mistakes of the last decade we don’t really have fiscal sovereignty either — as in, we are having to cut at the worst possible time, for fear of being shut out from international lending. So, we are reduced to hoping that the world economy picks up, and that this will outweigh the impact of rising interest rates and a worsening exchange rate environment. While anger may not be a policy, hope is not much of one either (especially since a double dip recession worldwide still can’t be ruled out).

The micro/labour market perspective at one level only adds to the gloom, pointing out the enormous long run consequences of unemployment for some people, and thus for society at large. But at another level you guys surely have a major role to play in suggesting ways to minimise the long run consequences of this slump — providing that the schemes you propose are budgetarily feasible.

Kevin : a scheme should pass a Cost Benefit analysis. Thats not the same as being budgetarily feasible.
Its worth remembering that cost benefit analysis generally assumes a Walrasian model so the wage rate is the opportunity cost of labour. With involuntary unemployment thats out the window. There are papers that works out CBA for such cases. I used to teach some of this, but for the life of me, I cannot remember the details. Doubtless the mandarins know all of this anyway…
At the moment the government is paying lots of people not to work and somehow one thinks there has to be a better way. I have in mind some (vague) idea of the unemployed being issued vouchers which they can cash-in as dole or they can present it to an employer who can redeem it.
But I think we have to be clear that even the smartest guys in the room may not be able to think up a scheme that is guaranteed to work. But given the urgency of the situation there is a compelling argument for trying something, perhaps trialling it somewhere. This is harder in a small country I know.
I would also reiterate a point I made elsewhere namely the importance of joined-up thinking. Benefit reform, active labour market policy and minimum wage policy have to be co-ordinated.


fair point on the micro guys coming up with the ideas.

I think we are looking at redirecting what is already being paid in dole but aligned to some longer term strategy. At one part of the labour market, for example, I could increase the numbers working with me on our research grants with waivers of prsi/pension contributions so instead of hiring one I hire two. With some contribution from current dole payment too, I am hiring more. I think we should commit to ensuring some formal training element in all of this and so on. So current money (dole, grant income which often is non exchequer anyway in social science) gets us more people and we all win.

A small example – but I accept we don’t have more money to spend. The challenge is to look hard at what we can do with what’s currently spent. I think that also will promote debate on labour market restrictions (we are terrified in uni sector of fixed term worker legislations so are taking an age to hire against grant income), about migration (are we thinking of restricting that now in some way?) etc.

Apologies for the narrow focus on what could be done in this one sector but it served as an immediate example.

Apologies also for semi literate nature in places of last post – lying in bed with flu and iPhone which is not best place for tapping out such posts! The gist came across I think!

@ all

Comparing Ireland to either the U.S or Germany is pointless.

We have niether the borrowing power of one nor the financial rescources of the other, therefore any type of stimulous that requires real money is probably a non runner at the moment. We are where we are as they say.

But smaller measures can be looked at immediately while a much broader debate takes place.

A look at the minimum wage, council charges and high rental rates along with a reduction in energy costs would be a start.

How many businesses have had to lay off staff because it would be illegal to reduce their rates of pay?

How many are going out of business because the fixed overheads are unmanageable in the present climate?

How many start ups are delaying because of the cost of the above?

The work experience programmes that were trialled by the government failed (at least for now) and there is a real danger that this will kill off interest in these types of proposals. The Baker solution pointed to by Krugman and linked by Marisse above looks at incentivising employers to cut down individual employee hours while keeping the employees total pay constant. A nice deal for the employee and also potentially encourages the firm to hire more workers for a constant level of labour demand or to reduce hours rather than numbers of workers. There are approximately 1.5 million full-time workers in Ireland. To do the maths on this, you need to work out how much essentially a five per cent work subsidy for whatever subset you are targetting would cost. At the boundary it would cost nearly 5 billion gross, but could potentially save 100,000 jobs if the lower working hours were directly substituted for more people or less layoffs. You can scale up and down both these figures and depending on inclusion criteria, take-up rates, your preferences for multipliers and what you are willing to include as counterveiling benefits (e.g. reduced social welfare) then this can look very good under some assumptions and pretty lousy under others. One advantage the scheme has is lower risk of the type of deadweight loss that has been discussed here before. In fact, this scheme might work best in companies where workers are pretty secure in the sense that the constant labour demand assumption might work best for companies doing reasonably well.

And where exactly is the cash for these subsidies coming from? I was under the impression we were skint! Presumably the advocates have done the maths versus the cost of a person being ‘on the dole’. Fair enough. I don’t see it being a big one for this government though as they seem much more focussed on short-term firefighting.

Is there not a danger that, without a sunset provision, employers become addicted to the subsidy?

There must be a problem with choosing which jobs/sectors to subsidise.

If sectors which are open to global competition are subsidised is that not ignoring global labour supply (quality and numbers) and demand (as required by free movement of capital across nations).

If the multinational sector is subsidised are we not giving them a rod with which to beat us at a later date. “Continue the subsidy or we’ll pull the plug”.

In a global market place it seems nonsensical to me that governments should subsidise labour. In the long run labour will remain expensive relative to the market. The government and particularly the Green Party keep emphasising the “Smart Economy”. Does that also require subsidy? If it does then it can’t be that smart.

Subsidising labour might lessen the burden of welfare payments in the short term but could also act as an impediment to adjustments in the labour market, whether by emigration or reduction in the cost of labour.

This is not America. Not only do we not have the world’s reserve currency we no longer have monetary sovereignty. This is not Germany. We do not have a similar indigenous industrial base, were retaining a skilled workforce awaiting an upturn in demand makes some sense (and no, I don’t have evidence for that statement).

With our acceptance of globally traded goods and services and an inability to devalue we have no choice but to reduce the median wage and welfare payments or substantially increase productivity. The State sector cannot be excluded from this or it will be a millstone around the neck of the private productive sector.

Much of the increase in both wages and welfare over the last decade was based on nothing other than funny money (excess global credit). The party’s over. Taking a subsidy “hair of the dog” won’t get it going again.

I think when such subsidised workers are spotted nailing up elections posters for the next election,,, then the cat will truly be out of the bag!!


The danger of using the microperspective for a macro-issue like unemployment is best illustrated with the analogy of cooling your kitchen by leaving the refrigerator door open.

Of course, while cool air appears to stream out of the front of the fridge, the “coolness” is the result of even greater heat release on the other side of the fridge. A microeconomist, standing in front of the open fridge door, might well congratulate himself on the effectiveness of his cooling measures, all the while blissfully ignoring the macroeconomist behind him who is holding the thermostat and pointing out that the room keeps getting warmer….

So it is with the German labour market. Unemployment in Germany is high. Period. And if Krugman thinks that is a good thing, I would invite him to have a drink with some long-term structurally unemployed steel workers in Solingen.

Or just watch some reality TV on RTL. 🙂

I think that activities which do not pay but which may add to your CV would be hugely popular with many unemployed people.

I think that the universities have a role to play on the qualiy assurance side of such projects. I think the Govt could bring in tax breaks for companies willing to donate the use of buildings and ICT equipment.

Another benefit of such a scheme would be that it could help many of the people who foreswore further education in favour of employment in the construction industry. That group poses a major problem for this country.

Hi All,
At the moment the government is disincentivising employers from employing because of the high rate of employers PRSI. This coupled with the high labour costs anyway mean employers will try to operate with as little staff as possible, even if it might impact on the quality of service, output etc.
If public sector pay was actually addressed properly along with other cuts and certain tax increases we could easliy raise 7-8 billion in the budget and redirect 3-4 billion into removing this disincentive that exists.

I know the corporate tax rate is a sacred cow but I would also increase this and say to business that every cent raised in this would go to reducing employers PRSI further. If we increase it to say 15 or 17.5 %.

My budget would be as follows;
20% off public sector pay and pensions (scaled to effect those on higher salaries more, anyone under 30k protected altogether) – 4 billion raised.

10% off social welfare across the board. If you link every payment to income you will only get more poverty traps (according to the Sunday Times I would be 4k better off on social welfare). – 2 billion raised

48% tax rate on income over 80K and removal of cap on emplyee PRSI 1-2 billion raised???

Savings on capital budget – 750 million

Increase in corporation tax to 15% – ???? raised

As someone living on 35K with a family of 5 to support (and doing so with little trouble) this seems like a load of low hanging fruit. Nobody is going hungry from these measures and they will provide 4 billion extra to implement a job stimulus to help those who are the real victims of the recession.

@ zhou

Not wishing to be negative but what would they be trained to do?

There are enough lawyers, doctors, accountants, nurses, teachers etc to keep this country going for a decade.

Training people to use a spreadsheet or photoshop won’t do much for our comptitive position though it might massage the unemployment numbers.


Loads of different things depending on their existing qualifications, skills and abilities. I think there are many profects which would be undertaken that would have a social dividend, would help people’s view of their self-worth and would not skew competition.

As for the skills for the construction workers, I think they could be trained in any number of things, could carry out a number of good projects (insulating schools, repairing public buildings).

The selection of projects would have to be micro managed locally and would depend on the skills of the more qualified unemployed people who would be running many of the courses.

General management, cost management, basic accounts for self employed people, internet research skills, desk-job computer skills and so forth could all be taught to those anxious to learn.

Some might be well suited to mechanical work, machinery repair, farm labouring.

Some might be able to learn more about construction techniques and retro-fitting buildings to make them more energy efficient.


I marvel at your ability to support a family of 5 on 35k a year, anywhere in Ireland. I wonder are you calculating the imputed rental value of your home as income? Not to pick on you, but this is a major equity issue that is often overlooked in the debate on how to make taxes ‘fair’ through proportionality.

To see why, let’s consider two neighbours in Drumcondra, both with families of five: Tim and Jim.

Tim earns 35k and owns a large family home – 4br in Drumcondra, say – which he inherited. The rental value of this property, should Tim choose to rent – would be EUR 2,200 / month. But of course, with his family of five, Tim stays put.

Jim, on the other hand, was not so wise in his choice of parents. They went SKIing and sold their 4br in Drumcondra for a couple of world cruises in the QEII, before taking the great Cruise Ship in the Sky. So Jim, with his family of five, is forced to rent a similar house to Tim’s, for EUR 2,200 a month.

Fortunately for Jim, he works harder than Tim, and therefore earns EUR 26,400 a year more (total salary: 61,400).

Some points to note:

Tim’s nominal income is 35k, but his actual income is the same as Jim’s. Even leaving aside the injustice of inheritance, any tax system which does not fully relieve Jim’s rent against income, is inequitable.

It is also inefficient because it makes property markets stickier by using the income tax system to discriminate against property rental in favour of ownership.

Another option of course would be to charge income tax on imputed rental income for owner occupiers. That might prove practically difficult and politically impossible, though.

@ zhou

What you suggest sounds good but a bit too good.

Sounds like the government micromanaging the economy to me. I don’t think they’re good at management.

Who’s going to pay and how much will it cost?

Sheesh Greg!

I was just floating a general concept whereby incentives could be put in place to make it easier and cheaper for meaningful activities for unemployed people to be put in place with a social dividend and without skewing the economy. It is not micromanaging the economy because the people would not be involved in economic activity in competition with others. It is a way to leverage the skills of people who are out of work and the resources in the private sector (buildings and ICT infrastructure) that are not being used.


Don’t you think the destabilising effect of a 2.5-5% increase in corpo tax would be enough to scare off plenty of flighty companies, or at least give them cause to consider their options?

No question the low CT rate is a big draw for companies at home and abroad, but it’s also the fact we’ve kept it constant for so long – companies can plan around it, safe in the knowledge the government won’t keep tinkering with it every time it needs to raise a little extra capital.

As Colm and others point out the case for subsidies is stronger in recessions when unemployment is high. Alot ofb the same arguments might be used to argue that firing costs should be temporarily higher in recessions. At the moment a firm pays PRSI and claim a rebate

As Colm and others point out the case for subsidies is stronger in recessions when unemployment is high. Alot of the same arguments might be used to argue that firing costs should be temporarily higher in recessions. At the moment a firm pays PRSI and can claim a rebate against this when they make a worker redundant. Maybe we could change the mix when unemployment is high with lower PRSI and a smaller rebate.

@Kevin Denny
Our politicians/administrators need to do something. But given their lack of economic knowledge it will probably be the wrong something.
That is why I argued for the once off wage adjustment.
It is probably an over the top idea but it is an attempt to address our core problem. I would support anything that has the same effect on the labour market but is simpler, quicker and more effective.

@Graham Stull. I think you will find that (a) most microeconomists know some macro ( I studied it at university for 6 years: what did you do?) & (b) they are not stupid. The fridge example is trite at best.
@E20Bn: Sure wage adjustment is needed but that doesn’t mean other things cannot be tried. I don’t think one should dismiss out of hand the possibility that they might do something useful. With more than one problem, you need more than one instrument. Cutting my wages, however desirable, isn’t going to do much for the young unemployed people.

@ Kevin Denny

Thanks for that informative comment and interesting biopic. I too took macro courses, though doubtless not as many as you – and I’m sure I got lower marks and retained less. I’ll try to make my analogies less trite in future.

Back to the issue: ‘Trying out’ creative micropolicies may be intellectually appealing, but it is not costless. Policymakers (or “the Mandarins”) have finite resources to devote and policymaking is bureaucratic and time-consuming, even without the added burden of innovation. E20Bn’s suggestion of focusing on core adjustment is at least appealing in that regard.

Cutting your wages may indeed help youth unemployment, though I certainly don’t think it desirable an sich. The contribution sustainable fiscal management makes to long-term economic growth is the very forest we should not forget in looking at the trees of all these micro labour initiatives…

…ah but, I’m drifting into trite analogy again…

@ Graham,
Your argument does not apply to me as I am renting, happily. My rent costs €650 per month. I do get approx. 2000 per year mileage which nearly covers about half of my car running costs.
I was on 22k 3 years ago when I started my job, so I have learned the art of frugal living.
I certainly didn’t contribute to the bubble economy therefore, athought I still have my windfall from the ‘ big bertie bubble giveaway’ in the form of approx. 25k from child benefit tucked away for a rainy day.

Comments are closed.