CEPR Discussion Paper No.4225 - 'Creating Low-Skilled Jobs by Subsidising Market-Contracted Household Work '
Authors: Tilman Brück (DIW), John P Haisken-DeNew (RWI and IZA, Bonn) and Klaus F Zimmermann (University of Bonn and CEPR)
February 2004
An interesting characteristic of the German labour market is the existence of an extremely high unemployment rate for low-skilled workers and at the same time the non-participation in the labour market of well-educated mothers. In 1998, around 23% of the low-skilled were unemployed in Western Germany and 54% in Eastern Germany. This contrasts with labour market participation rates in Germany in the year 2000 for university-trained, married women aged 18 to 65 with children aged 0 to 1 year of only 26.5%. This may be caused by prohibitive non-wage labour costs for low-skilled jobs and also the large transaction costs in the market for domestic labour preventing market clearing.
CEPR Discussion Paper No.4225 addresses the role of these factors by analysing the demand for household work. In most instances labour used for household work is hired in the German shadow economy. The German socio-economic household panel, which records casual domestic employment, is used in this study to estimate the demand for such household work. The authors find that the demand for household work in the shadow economy is very sensitive to changes in household income. This suggests that targeted wage subsidies, linked to household work agencies, would be very effective in raising the legal demand for domestic help. A wage subsidy of 50% of wage costs could thus establish up to 500,000 new jobs for previously unemployed or non-working low skilled workers. The net fiscal costs of such a scheme are about 6.200 euro per full-time job. In addition, society would benefit from more law enforcement and from an increased female labour supply, especially of highly qualified mothers.
| 
Up