€25,000 Per Job: German Regional Subsidies Defy Orthodoxy, Boost Less-Educated Employment 23%

Government place-based subsidies effectively create jobs for vulnerable and younger workers at a cost of €25,000 per job, with benefits lasting up to a decade after funding.

Photo by Waldemar on Unsplash

The NBER working paper "Who Benefits from Place-Based Policies? Evidence from Matched Employer-Employee Data" by Philipp Grunau, Florian Hoffmann, Thomas Lemieux, and Mirko Titze proves these targeted subsidies work — challenging skepticism that place-based (i.e. regional) policies are inefficient or merely fund investments companies would make anyway. For policymakers worldwide seeking to boost regional activity, this provides evidence that well-designed subsidies can create lasting employment in economically weak areas.

The research:

Economists have long debated whether government subsidies to businesses in struggling regions are effective. This study provides the first comprehensive evidence by combining:

• Unique data: Researchers matched the universe of German administrative employee data with complete GRW funding records and regional eligibility parameters

• Natural experiment: EU competition laws create sharp geographic boundaries in subsidy eligibility that municipalities cannot manipulate

• Establishment-level analysis: Rather than just examining aggregate statistics, researchers could track precisely which businesses received funding and how they performed

• Commuter tracking: The dataset's unique feature of documenting both place of work and place of residence allowed researchers to directly quantify regional spillovers

By the numbers:

• €25,000: Cost to create one additional job at the establishment level

• €20,000: Cost per job at the municipality level (slightly lower due to spillover effects)

• 7: Average number of additional jobs created per subsidized establishment (from baseline of ~20 employees)

• 21%: Average employment increase at subsidized establishments

• 50%+: Proportion of new jobs filled by commuters from other municipalities

• 31%: Increase in commuters from the same labor market region

• 16%: Increase in commuters from adjacent labor market regions

• 10+ years: Duration of positive employment effects after subsidies end

• 3-4%: Temporary wage gains for incumbent workers

• 5.3%: Wage increase for workers with post-secondary education

• €300,000: Average expenditure per subsidized establishment per year

• €1+ trillion: Amount Germany has spent supporting East Germany since reunification in 1990

• €14.9 billion: GRW budget for 2000-2006 funding period

• €11.5 billion: GRW budget for 2007-2013 funding period

• €5.5 billion: GRW budget for 2014-2020 funding period

How the GRW program works:

• Started in 1969: Created to close socio-economic gaps between structurally weak regions and the rest of Germany

• Eligibility scoring: Based on unemployment (40-50%), gross wages (40%), infrastructure quality (5-10%), and employment projections (5-10%)

• Funding periods: Typically seven years, aligned with EU funding cycles

• Subsidy rates by establishment size:

  • Small establishments (<50 employees): 15-50% of capital costs

  • Medium establishments (50-249 employees): 7.5-50% of capital costs

  • Large establishments (250+ employees): 0-35% of capital costs

• Geographic targeting: Funding rates vary across labor market regions (similar to U.S. commuting zones)

• Enforcement: Establishments must guarantee job creation or maintenance; projects monitored for five years

• Infrastructure component: About one-third of funding goes to municipal business-related infrastructure projects

• EU compliance: Program operates under European Union rules for regional aid, with regions below 75% of EU average GDP automatically qualifying for highest subsidy rate

Who benefits:

The researchers found clear evidence about which workers gain most from the subsidies:

• Less-educated workers: Experience 23% employment gains compared to just 9% for workers with post-secondary degrees

• Younger workers: Subsidized establishments hire disproportionately younger employees (average age decreased by 1.7 years)

• Previously non-employed: Nearly half of new hires come from non-employment

• Workers with lower tenure: Average tenure decreased by 12.4% at subsidized establishments

• Commuters: Over half of new jobs go to workers living in different municipalities

• Marginally employed workers: Increased by 19% (workers with monthly earnings below €450)

Surprising discoveries:

• Growth-oriented firms apply: The common assumption that struggling businesses seek subsidies is wrong - fast-growing establishments with good prospects are more likely to receive funding

• Long-lasting effects: Employment gains persist for at least 10 years after funding, with no evidence of job cuts after regulatory monitoring ends

• Hiring drives growth: Job creation comes primarily from increased hiring (43% increase) rather than reduced separations (12% increase)

• Limited wage effects: Despite substantial employment gains, wage effects are modest except for incumbent workers

• Similar impact across sectors: Subsidies work in both service and capital-intensive industries, challenging assumptions about targeting manufacturing

• East-West divide: Program shows stronger effects in West Germany (21.9% employment increase) than East Germany (4.3% increase)

• Industry effects: Largest impacts in trade & transportation (16.4% increase) and other services (10.8%); smallest in communications, finance & real estate (-1.3%)

• Limited spillovers: Little evidence of employment spillovers to non-subsidized establishments in same municipalities

Research methodology:

• Event-study design: Compared 286 funded establishments to matched control establishments for 9 years (4 before and 5 after funding)

• Extended tracking: Followed 164 establishments for 10 years after funding

• Geographic matching: Compared establishments across municipality borders with different subsidy rates

• Control selection: Matched on industry, baseline employment, and pre-event growth trends

• Sample expansion: Larger sample of 1,816 establishments when using county-level rather than municipality-level matching

• Placebo tests: Confirmed no differential trends between treated and control areas

• Instrumental variables approach: Used subsidy rates as instruments for actual funding amounts

• Labor supply elasticity: Estimated to be 6-7%, consistent with recent monopsony literature

Policy implications:

• Place-based policies work: At €25,000 per job, these subsidies efficiently create employment in disadvantaged areas

• Target labor market regions: Designing programs at the commuting zone level contains spillover effects

• Sector-neutral approach: No evidence supports targeting specific industries; effects are similar across sectors

• Implementation matters: Programs need proper geographic targeting and monitoring to be effective

• Expect some distortions: Wage gains for incumbent workers and geographic spillovers represent trade-offs

• Optimal design: The findings validate key principles from Austin, Glaeser, and Summers (2018) for effective place-based policies in the 21st century

• Redistribution effectiveness: Results inform recent theoretical work by Gaubert et al. (2025) and Fajgelbaum and Gaubert (2025) on optimal place-based policies with regional spillovers

Bottomline

Place-based investment subsidies in disadvantaged regions create lasting jobs at a relatively low cost per worker, with effects concentrated among younger and less-educated workers who need opportunities most.