The paper examines the relative effectiveness of two policy proposals in reducing
unemployment and working poverty: unemployment vouchers and low-wage subsidies. The
unemployment vouchers are targeted exclusively at the unemployed (especially the longterm
unemployed) and are provided only for a limited period of time. The low-wage subsidies,
on the other hand, are granted to all low-wage earners regardless of their employment history
and are of limitless duration. Our analysis indicates that the relative effectiveness of the two
policies depends on workers’ prospective wage growth. The more upwardly mobile workers
are (i.e. the more their wages rise with employment duration), the more effective will
unemployment vouchers be relative to low-wage subsidies. Conversely, the greater the
danger that workers come to be trapped in dead-end jobs with flat wage profiles, the more
effective will low-wage subsidies be relative to unemployment vouchers.
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