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We examine theoretically and empirically how wage subsidies and minimum wages interact regarding to employment opportunities, and how these interactive effects vary across different groups of workers. Assuming a neoclassical labor market and heterogeneous work, subsidized low-skilled worker displace less-skilled workers. The effect on non-subsidized low-skilled workers remains theoretically open. The empirical examination for the US shows that increasing minimum wages decreases less-skilled employment, haven’t an effect on non-subsidized low-skilled employment and induce a hump-shape of subsidized low-skilled employment. For Germany, however, several simulation studies indicate that the provided minimum wage and existing wage subsidies do not cause substitution effects, but lower employment of all workers in the low wage sector regardless of a grant funding.

Free and competitive insurance markets are not able to provide a system which can be considered economically efficient to deal with the material risks of unemployment. Nor are individual unemployment insurance savings accounts - even when regulated by the state - a superior alternative. If the economic feasibility of an unemployment insurance system is not in itself to be put at risk, coverage must in general be the responsibility of the state. However, the present design of state unemployment insurance can only be regarded as very inefficient and requiring urgent comprehensive reform. An increase in individual freedom and responsibility, as well as more competition are at the heart of a promising modern reform concept which takes into account the specific nature of the risk inherent in unemployment.

The paper shows that a more flexible labor market is unequivocally necessary for a lasting and substantial reduction of unemployment. It furthermore points out that a more flexible labor market is even beneficial from a long-run distributional point of view. Hence, the key to liberalizing the labor market lies in overcoming widespread short-run distributional concerns. Increasing the short-run elasticity of labor demand with respect to the real wage by fostering venture capital markets appears to be a crucial stepping stone.