In an attempt to protect workers from unemployment, governments in some countries subsidize firms which would otherwise fail. This article examines the effects of such subsidies on output, prices, and welfare. It also briefly reviews the effects for varying price elasticities of supply and demand, for nontraded and fully traded goods, and for firms in which wages exceed their free market level. If the firm produces a nontraded good, the “sickness” of one firm that is subsidized to maintain production can spread to other firms that would be viable in the absence of the subsidies. The analysis shows that the exit constraints have the most detrimental effect when the elasticity of demand is low and supply elasticity is high, and when the government weighs the welfare of the firm's workers and consumers less than that of the general taxpayers and the firm owners. When labor costs are higher than their free market levels and output is thus less than the optimal levels, the subsidies could have an effect similar to that of an optimal production subsidy. In practice, however, this possibility is likely to be outweighed by associated rent-seeking costs and other distortions.