By Chun-Hung Kuo and Hiroaki Miyamoto
This paper examines the effects of fiscal stimuli in the form of job creation subsidies in a DSGE model with search frictions in the labor market. We consider two types of job creation subsidies: a subsidy to the cost of posting vacancies and a hiring subsidy. Our model demonstrates that qualitative effects of a vacancy cost subsidy are similar to those of a hiring subsidy. Quantitatively, however, the vacancy cost subsidy is more effective in lowering unemployment than the hiring subsidy. We also compute fiscal multipliers for both traditional increases in government spending and increases in job creation subsidies.
The two stimuli have the same cost to the government, and as the firm is risk-neutral, taking one or the other does not affect directly the value of posting a vacancy. As so often in general equilibrium models, the action is all in the derivatives. A posting subsidy encourages directly firms to post, but to hire only indirectly. A hiring subsidy is more targeted, and thus more effective, and even more so than spending that subsidy in general public expenses, which are of course the least targeted.