Do Wage Subsidies Reduce Ordinary Employment?

Applying administrative register data information for Danish firms in 1999, 2000, and 2001, this paper investigate how the employment of wage subsidized labour affects ordinary employment at the firm level. Descriptive statistics as well as econometric estimations are presented. Descriptive analysis shows that ordinary and subsidized employment is positively correlated, i.e. employment of subsidized labour does not reduce ordinary employment. But an underlying similar movement in production levels might cause the correlation. Simple inclusion of a production level proxy in OLS estimations does not sufficiently control for the underlying correlation, but additional control for the size of the change of production indicates that subsidized labour to some extent substitutes non-subsidized labour. But the substitution depends on the applied econometric specification, i.e. a cumulative logit specification gives mixed results concerning the substitution effect.