Do pro-employment public policies matter?

Theoretical and empirical studies addressing the effectiveness issue of the wage subsidy scheme are somewhat non-concluding. This paper attempts to contribute to the recent litterature of the field by studying the effectiveness of wage subsidies and by comparing their consequences with those associated with capital investment subsidies program. We develop a neoclassical model with Romer (1990)'s variety expansion framework in which we include employees' human capital. We find that the wage subsidy has no effect on the employment rate. This arises because the positive incitation effect of the subsidy is entirely compensated by the negative distortion effect of the tax exerted on human capital investment. Furthermore, a subsidy on capital goods purchased by final firms is likely to be effective in raising equilibrium employment rate provided that the relative contribution of capital goods to production exceeds the one of human capital.