Sector-specific factor subsidies and employment in a regional price-endogenous export-base model

In this paper we use a variant of the 1-2-3 trade-focused general-equilibri um model to calculate the employment effects of factor subsidies applied to the regional export base. Analytical expressions are derived for the chang e in basic employment and the export-base employment multiplier. These expr essions are compared with the conventional hybrid approach where the impact on the recipient sectors is analysed by using a partial-equilibrium method and the effect on other sectors is calculated through some form of demand- driven multiplier. The conventional hybrid procedure fails to capture fully displacement in the regional labour market. If we use the general-equilibr ium results as a benchmark, numerical simulation suggests that the hybrid a pproach substantially overestimates the employment effects of the subsidies . Similar problems are likely to apply to the evaluation of all supply-side policies targeted on the regional export base.