Wage subsidy programmes

Overview

The research suggests that wage subsidy programmes are likely to have a low positive impact The impact rating indicates whether interventions of this kind, on average, make it more likely that young people will get a job afterwards. This rating is based on the level of impact that youth employment interventions can generally be expected to have. More information can be found in the Toolkit Technical Guide on youth employment outcomes.

The evidence suggests that in general the benefits of wage subsidy programmes tend to outweigh the costs.

What is it?

Wage subsidy programmes offer payment to employers who agree to employ people from a specific social group who might otherwise struggle to access the labour market.

The subsidy usually covers some (or, less commonly, all) of the wage and non-wage costs of employing a young person. The subsidy can be made as a direct payment to the employer, or as a reduction in the employer’s payroll tax or National Insurance/social security contributions. Less commonly, it can be paid directly to the employee as part of their wage. Subsidies can be used to cover vacancies that arise within the workplace, or to create new vacancies. Wage subsidy interventions tend to offer short-term work experience, which over time will help young people to secure longer-term employment.

Wage subsidy programmes are typically provided by governments through public employment services, with the main goal of incentivising employers to hire members of a defined target group. Well-known examples in the UK include:

• The Kickstart scheme, part of the Plan for Jobs programme during the Covid-19 pandemic. This provided funding to employers for wages, National Insurance and pension contributions.
• The Future Jobs Fund, introduced following the 2008/09 financial crisis. This funded jobs that lasted at least six months and benefited local communities, with a requirement that employers supported workers to move into longer-term work.
• The New Deal for Young People, introduced in the late 1990s to reduce rates of economic inactivity, unemployment, and long-term unemployment among young people. Following an intensive ‘Gateway’ period of job-searching, participants chose between four different pathways, one of which involved a six-week work placement in a subsidised job.
• Employers have also been offered wage subsidies through various funding incentives when taking on certain groups of young people as apprentices.

Some key design choices for wage subsidy programmes include:

• How to target the subsidy, for example by length of unemployment or receipt of specific benefits.
• How to identify and engage the target group. This may involve using administrative data, working with public employment services, or advertising vacancies along with eligibility criteria.
• How to identify and engage suitable employers. Schemes may restrict the kinds of employer that can receive wage subsidies, for example to the private sector or to non-profit organisations.
  Whether to pay the subsidy to the employer or the employee.
• How to make the subsidy, for example as a direct payment or a reduction in tax or other payments by employers.
• How large a subsidy to offer, depending on the available funding, typical wage levels, the costs of employing particular groups of young people, and whether training or other support must be funded.
• How long the subsidy should last. Wage subsidy programmes usually cover employment for a period of less than a year; their duration may reflect the economic context in which they are introduced.
• What conditionality is applied. Employers generally receive the full subsidy only when certain conditions are met, such as retaining the young people in employment for the full subsidy period, or taking them on as a longer-term employee at the end of the intervention.

Costs

Information on programme costs is available for the two UK programmes included in the research for the Toolkit. The evidence, albeit limited, on the cost of providing wage subsidy programmes is generally positive, with the benefits tending to outweigh the costs. For the periods in which these programmes are needed, wage subsidy schemes tend to be efficient and have good affordability.

The cost rating for wage subsidy programmes is high.

• Number of inputs: Several, including funding for the subsidy, programme management, and the activities associated with taking on a new employee.
• Duration of inputs: Although the duration of employment varies, the inputs to the wage subsidy programme within this may be relatively short-term.
• Sources of inputs: Inputs come primarily from the funder and the employer.
• Expertise: Limited.
• Settings: Wage subsidy programmes take place in established workplaces.
• Intervention-only inputs: The work elements of the programme are likely to be common to employees across the employing organisation. The funding and programme management elements are usually specific to the intervention.

A study of the New Deal for Young People found that the social benefits of the intervention exceeded the social costs per additional employee. The latter were estimated at less than £4,000 per participant (this relates to the whole programme rather than just the wage subsidy element). An initial cost-benefit analysis suggested that it was worth continuing the programme solely based on its efficiency.

The evaluation of the Future Jobs Fund found substantial financial benefits of the programme for participants, employers, and the Exchequer.

Key findings

The research suggests that wage subsidy programmes are likely to have a low positive impact on youth employment outcomes.

The research suggests that, on average, for every 33 young people who can take part in a programme, one will get a job who wouldn’t have done so without the intervention.

The confidence interval Indicates the precision of a statistical estimate. The ‘confidence interval’ is the range within which the vast majority of values for a population (such as the people who experience an intervention) are likely to occur identified for this estimate means that this number could vary between about 25 and 46.

About the evidence

You can find details of individual studies of evaluations of wage subsidy programmes, as well as other systematic reviews of youth employment evaluations, in the Youth Employment Evidence and Gap Map.

How does it work?

Wage subsidy programmes make it easier for young people who are at risk of disadvantage in the labour market to get a job. They do this by reducing the costs and risks to employers of taking on a young person, especially one with limited work experience and/or qualifications. This allows the employer the opportunity to get to know the young person better and learn how they might fit longer term in the role or organisation, while providing an opportunity for the young person to acquire skills and experience.

Once they have become employed in a subsidised job, young people should gain skills and experience that will make it easier for them to gain work in the longer-term. This may include a job in the organisation that employs them as part of the intervention, such as the continuation of their subsidised role on a permanent basis without a subsidy. Young people may also be able to access better career paths through the skills and experience acquired through the employment provided by wage subsidy schemes.

How to implement it well

Building employer engagement

Effective wage subsidy interventions use a level of subsidy that is affordable for both government (central and/or local) and employers, to maximise incentives and minimise risks to employers. Employers need to know about subsidies and their potential benefits, and how to apply. Highly bureaucratic application procedures for employers could reduce the appeal of the initiative. Employers must also be willing to recruit young people from the target groups.

If employers use the same recruitment criteria for subsidised opportunities as they would for regular recruitment, this can limit opportunities for certain groups of young people who typically face marginalisation in the labour market. For example, this approach can be challenging for young people who have been in contact with the criminal justice system.

Evidence from the New Deal for Young People shows that younger age groups, disabled people and those from ethnic minority backgrounds were less likely to participate in subsidised employment opportunities, compared to other pathways offered by the programme. This may have been driven in part by employer attitudes towards taking on these groups of young people.

Incentives, costs, and risks to employer participation

Incentives may help to get employers involved in wage subsidy programmes, especially if they are also required to provide some training for recruits.

To maximise employer participation, the wage subsidies offered to employers must be big enough to act as an incentive and to reduce risks to the employers. The evidence shows that employers engage with wage subsidy programmes as a relatively risk-free way to ‘try out’ young people in the workplace.

Additional support available for basic and employability skills

Some evidence suggests that young people who are more ‘work-ready’ can gain greater benefits from wage subsidy interventions. Providing additional support for basic and broader employability skills, within the design of the wage subsidy programme, can help to maximise opportunities for young people who are at greater risk of marginalisation, especially where these groups are the ‘target’ of the intervention.

Candidates for subsidised roles can also benefit from preparation activities before they apply to and enter subsidised jobs. Young people who get a job through a wage subsidy intervention can improve their prospects for future employment where ‘wraparound’ vocational training is offered.

Young people also benefit from diverse opportunities within a wage subsidy programme, by gaining a greater range of experiences of the workplace and sector.

Creating sustainable, long-term employment opportunities

The research shows that wage subsidy programmes have a greater impact on youth employment where programmes emphasise the creation of jobs that are sustainable beyond the subsidised period. This may involve adjusting the design and creation of the job opportunities themselves, or the kinds of support provided alongside subsidised employment. Trusted, ongoing in-work support can help to retain young people in employment, by working with the young person and the employer.

Creating opportunities that match with the local labour market

To make sure that young people can access sustainable employment, opportunities created by wage subsidy programmes need to match the occupations and/or industries that are in demand in the local labour market. Place-based partnerships between public, private and third sector organisations (at city or sub-regional level) are important in ensuring that this is the case. Place-focused partnerships can generate opportunities that are consistent with local labour market needs. For example, a focus on the ‘functional economy’ of places (considering e.g., travel-to-work zones) can increase the creation of suitable opportunities.

Summary of evidence

• The evidence suggests that wage subsidy programmes have a positive impact on youth employment outcomes for disadvantaged young people. This is the finding of a meta-analysis of studies that met the criteria for the Youth Employment Toolkit, and it is in line with the conclusions of other studies of wage subsidy interventions.
• The evidence base for the impact of wage subsidy programmes as an intervention to support youth employment is relatively small. This may reflect the challenges of evaluating these programmes.
• Additional research is needed to understand how wage subsidy interventions can best support young people who are at risk of different kinds of marginalisation, and to explore the relationships between programme duration and impacts.

Useful links

• A review of issues policy, theories and evidence for wage subsidy programmes, produced by the International Labour Organisation
• An evaluation of the Future Jobs Fund including extensive process information.
• A study of customer experiences of the Future Jobs Fund, conducted for the Department of Work and Pensions.