Table 2: Regional Incentives in Europe
Another study which sheds some light on the relative empirical importance of employment and investment subsidies is Yuill et al. (1994). This study is more limited by the fact that it only covers regional policies in a sample of EU countries and only the three or four most important programmes for each country. The study has the advantage, however, that the data is country.
Table 2 shows that, while in nearly all countries under consideration, investment promotion plays an important role, significant programmes directly subsidising labour are reported for three countries only. Table 3 shows the expenditure shares of investment and employment subsidies. Here, it turns out that, even in those countries which do have employment subsidies, expenditure on investment promotion is much more important, with the exception of Italy.
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Investment and Employment Subsidies: Empirical Evidence
In this section, we present some empirical evidence about the role of investment and employment subsidies in industrialized countries. Somewhat surprisingly, there are few empirical studies trying to assess quantitatively the relative importance of these two types of subsidies. In the following, we discuss the results of three different studies. Firstly, on the basis of data collected by the OECD (1996), we consider the structure of aggregate general public support to industry in the OECD countries. Secondly, we use a report on regional incentive programmes in Europe (Yuill (1994)) to illustrate the role of capital and employment subsidies in individual European countries. Thirdly, we briefly consider the case of East Germany. In all cases, regional or sectoral subsidies are analysed. Subsidisation of employment and investment is measured relative to the general tax and social security system in the various countries under consideration. Our approach thus identifies how policies for specific sectors or regions are designed.
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The governments of nearly all industrialised countries use subsidies to support the economic development of specific sectors or regions with high rates of unemployment. Conventional economic wisdom suggests that the most efficient policy would be to reduce the cost of labour, that is to pay employment subsidies. Empirically, however, governments usually rely on investment rather than employment subsidies. In the debate on these subsidy policies, economists have repeatedly argued that the concentration of public support on investment schemes is inefficient. One example is the case of Eastern Germany, where, in spite of very high rates of unemployment, subsidy programmes almost exclusively support investment. Sinn and Sinn (1993) argue that the public support schemes for Eastern Germany distort the relative price between capital and labour and thus give rise to excessively capital intensive production.1 They conclude that this policy is suboptimal and that it contributes to the unemployment problem. Begg and Portes (1993) make the same type of argument and conclude that it would be desirable to switch to labour subsidies.
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