In this paper we use a variant of the 1–2–3 trade-focused general-equilibrium model to calculate the employment effects of factor subsidies applied to the regional export base. Analytical expressions are derived for the change in basic employment and the export-base employment multiplier. These expressions 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-equilibrium results as a benchmark, numerical simulation suggests that the hybrid approach 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.
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