Policy Note 45: Recruitment incentives – What the state can now do for the labor market

Austria's economy slumped by 7.4 percent in 2020. In February 2021, more than 500,000 people were registered as unemployed or in training. However, during a brief phase of reopening in Austria, last summer also showed that the labor market continues to function in principle. The opportunity to preserve jobs through short-time work was used intensively in 2020. For the period after the restrictive contact restrictions, however, short-time work should be reduced or replaced by cheaper and more effective instruments. The two primary objectives here are the rapid creation of new jobs and the positive shaping of structural change in Austria. This policy note describes the diverse international experiences with targeted hiring subsidies by the public sector and discusses and provides information on how subsidies for new hires can be derived in Austria.

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Recruitment subsidies as a suitable instrument for further shaping the labor market
EcoAustria's analysis shows that recruitment subsidies can be a suitable instrument for further shaping the labor market. The specific design will determine their actual success in practice. "In order to have the best possible effect and avoid undesirable side effects, a very targeted approach and careful consideration are required. For example, international experience suggests that recruitment subsidies are more effective if they are limited in time and the target group of the measure is not too restricted, but tends to be broader," emphasizes EcoAustria Director Monika Köppl-Turyna.

Short-time work has a long-term structural preserving effect

As long as closures and restrictive measures to reduce contact in the wake of the Covid-19 pandemic remain in place, short-time work will continue to be an important instrument in Austria. However, if these measures can be withdrawn, short-time work should be gradually reduced and supplemented or replaced by other instruments. This is because the aid for companies and employees, which was initially used for good reason, will then become a comparatively cost-intensive instrument that offers little incentive to return to a "normal" level of work. Short-time working also has a structural preserving effect if it continues to protect jobs that can no longer be sensibly maintained in the medium and long term.
This analysis shows that the labor market recovered noticeably in the summer of 2020, when the pandemic situation improved and many tough restrictions were lifted. The number of unemployed people decreased in the summer months, partly due to additional new hires and rehires, and the use of short-time work also fell significantly. This gives rise to the hope that the labor market will continue to function to a large extent and that the situation will ease again to some extent once the health risks have largely been averted. However, this alone will not be enough to bring the labor market back into pre-crisis mode. One of the reasons for this is that demand will continue to be subdued in some areas and companies will have to struggle with the consequences of the crisis.

Recruitment incentives subsidize new hires by exempting them from non-wage labour costs
Relative to normal times, it will then be even more crucial to strengthen the take-up of employment and thus curb the entrenchment of unemployment. "Recruitment subsidies subsidize new hires. For example, through a temporary - full or partial - exemption from non-wage labor costs. International experience suggests that carefully chosen recruitment subsidies can help to boost employment immediately after an economic slump and therefore in times of high unemployment," says Köppl-Turyna.

Some forms are likely to have a more positive effect
On the one hand, the instrument should be set up for a limited period of time, as this increases its cost-effectiveness. On the other hand, it is advisable not to restrict the target group of the measure too much (e.g. to particularly impaired persons), but to promote it on a broader basis (e.g. all unemployed persons), because any stigmatization effects then play a lesser role. With regard to the restrictiveness of the criteria, it is important to find the right balance.

Criteria that are too strict can increase the administrative costs for companies and the public sector and thus severely impair the use of the instrument. On the other hand, criteria that are designed too freely can increase undesirable deadweight or crowding-out effects.

Timing of implementation is crucial to its success
If it is implemented too late, there is an increased risk of unemployment becoming entrenched. Too early implementation, in turn, implies that many new hires are promoted that would also take place without the measure, i.e. the deadweight effects are higher. The measure should therefore only be decided and announced shortly before it comes into force. If companies anticipate the introduction of the measure, some recruitments that have perhaps been planned for a long time will be held back or postponed and only implemented when the company can expect a subsidy for them. This would only increase the costs, but not the positive employment effects of the measure.

Comparatively cost-effective
"Overall, experience suggests that recruitment subsidies can be comparatively cost-effective. Although deadweight effects also occur here, they are often lower than with other measures," summarizes Köppl-Turyna. The net costs of the measure are also lower because the additional employment effects increase public revenue (e.g. from social security contributions and income tax) and a reduction in unemployment reduces expenditure on unemployment benefits. This means that the measure can partly finance itself.
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Dual education and training for people of prime working age
Recruitment subsidies can therefore support the expansion of employment, but other instruments should not be overlooked either: Some jobs will probably no longer be able to be sensibly maintained even after the corona pandemic has been overcome. In other areas, however, the demand for qualified specialists will be high. It is therefore also necessary to discuss the extent to which existing forms of dual training and further education can be expanded and extended - especially for people of prime working age. In the medium and longer term, further measures should also be taken to reduce the high tax burden on labor and thus strengthen the supply and demand for labor as well as the development of private household incomes.