preliminary
The impact of employment subsidies
on job creation:
non-experimental evidence using firm
level data
Maarten Goos and Joep Konings (KUL)
motivation (1)
•
•
•
With the joining of China, India and the ex-Soviet bloc, there
has been a “great doubling of the global workforce” and
consequently a fall in the global capital-labor ratio especially
for low-skilled manual workers.
Recent technological change driven by computerization is
biased against low-skilled manual workers.
Both “facts” put pressure on low-skilled manual workers either
in terms of their employment prospects or in terms of their
wage.
motivation (2)
•
•
•
Whether wage dispersion or unemployment temporarily
increases during this transition period depends on the degree
of wage flexibility in the low-skilled labor market.
The literature suggests that wage flexibility will provide a
smoother longer-run transition of low-skilled manual workers
into other industries or skill-sets but that real wages are rigid in
European countries.
Could it be that subsidizing low-skilled manual employment is
an effective instrument to increase wage flexibility and
maintain low-skilled manual employment at least in the shortrun?
motivation (3)
Macro-economic papers
Micro-economic papers
Theory and cross-country or time
series evidence
-A great deal has been written on tax subsidies and
employment (see Nickel [2003] for a survey)
-Theoretically, the standard model assumes taxes are all
proportional. But tax subsidies can alter the
progressivity of the tax system which may, itself,
have an impact.
-----
-Empirically, there is no consensus on the employment
impact of taxes due to confounding variables in
cross-country and time series evidence.
Micro-econometric evidence
-----
-Few papers using firm level panel data. Crepon and
Desplatz [2002] use French matched employeremployee to find positive employment effects.
Gruber [1997] uses data from Chile to and finds no
employment effects.
-Both papers try to deal with the problem of only having
time-series variation in unobserved across-the-board
payroll subsidies.
motivation (4)
•
•
•
This paper will use a panel of Belgian firms to examine the
impact of lump-sum employment subsidies for full-time
manual workers known as the “Maribel subsidies”
Given that the Maribel subsidies introduced progressivity in
payroll taxes, we will first provide a framework to analyze its
impact under different assumptions about the nature of labor
and product markets
Second, given that Maribel subsidies were not applied across
the board and given that we have information about the actual
subsidy received by each firm, a set a straightforward nonexperimental evaluation techniques can be used to analyze the
impact of Maribel subsidies on full-time manual employment.
presentation outline
1. a framework to understand the impact of Maribel
subsidies on job creation
2. the history of Maribel
3. data
4. empirical analysis
5. conclusions
a framework (1)
•
•
•
A Maribel subsidy is a per-period lump-sum subsidy paid to
the employer for each full-time manual worker employed at
that firm. A framework is needed to understand the possible
impact of Maribel subsidies on full-time manual employment.
This framework must account for the existence of a
proportional payroll tax, wage bargaining between unions and
firms and the fact that each of many firms has some product
market power.
It will be argued that under realistic assumptions about labor
and product markets, Maribel subsidies are expected to
increase full-time manual employment.
a framework (2)
•
Assume the pre-tax and post-tax wage are given by:
(1)
w  w  T (w, t , )  w[1  t ]  
with t the proportional marginal payroll tax and  the lumpsum employment subsidy.
•
(2)
(3)
Tw 
Tww
T ( w, t , )
t
w
and T 
T ( w, t , )
 1

Tw
Tw
0

 0 and Tw 

w
a framework (3)
» when the firm has no product and no labor market power «
•
A group of homogeneous firms maximizes profits:
(4)
max   pY ( N )  wN
N
with p possibly different from the
economy wide aggregate price index normalized to unity and
such that YN ( N )  Y ( N )
•
(5)
N 0
and
YNN ( N )   2Y ( N )  N 2  0 .
YN ( N )  w p which for given p implicitly defines the
unconditional demand for labor function.
a framework (4)
» when the firm has no product and no labor market power «
•
Unconditional labor demand is given by:
(6) N (w) with
D
•
N D ( w)
w
0
Uncompensated labor supply is given by:
(7) N (w) with
S
•
N ( w) 
D
w
N S ( w)
N ( w) 
0
w
S
w
Setting (6) = (7) solves for employment and wages:
(8) N D (w[1  t ]   )  N S (w)
a framework (5)
» when the firm has no product and no labor market power «
•
Totally differentiating (8) wrt the pre-tax wage and the
employment subsidy gives:
N wS
dw
dw
 [1  t ]
1  D
0
(9)
S
d
d
N w [1  t ]  N w
(10) dN  N wD d w  0 and d    N d w  0
d
•
d
d
d
Maribel subsidies are expected to increase full-time manual
employment if labor and product markets are perfectly
competitive
a framework (6)
» wage-bargaining when the firm has no product market power «
Assume unions and firms bargain over the pre-tax wage and
firms then choose the level of employment:
(12)

  log  N D ( w) [U ( w)  U ]




max 

w
D
D
[1   ]log  pY ( N ( w))  wN ( w)  



with 0    1 .
a framework (7)
» wage-bargaining when the firm has no product market power «
•
It must be true in equilibrium that: (13)
D
 U ( w)

 [1  t ]N ( w) 

[1

t
]
N
(
w
)
w
w
  [1   ] 
F ( w, )   

0
D
N ( w) 
U ( w)  U
 ( w) 
•
The impact of employment subsidies on the pre-tax wage is:
dw
F ( w, )  
(14)

d
F ( w, )  w
a framework (8)
» wage-bargaining when the firm has no product market power «
•
Remember from (9) and (10) that
dw
dw
 [1  t ]
 1 and
d
d
•
dN
D dw
 Nw
d
d
An increase in employment subsidies decreases employment if
dw d
is larger than 1/[1+t]. An interesting question is under
what conditions employment subsidies lead to job destruction
rather than job creation (as was true for perfectly competitive
labor markets).
a framework (9)
» wage-bargaining when the firm has no product market power «
•
A necessary condition for (14) to be larger than 1/[1+t] is that
dw
F ( w, )  

0
d
F ( w, )  w
•
Given the concavity of the Nash-bargain in pre-tax wages, this
implies employment subsidies decrease employment only if:
(16)
2
F ( w, )
 [1  t ] 
D
D


 
NN ww   N w  
2


N 
[1  t ]N  D wˆ Nwˆ 
[1   ]
N wˆ

0


wˆ  
N  
a framework (10)
» wage-bargaining when the firm has no product market power «
•
For Maribel subsidies to decrease full-time manual employment,
the labor demand function must be sufficiently concave
and/or, in absolute value, the elasticity of labor demand must
be sufficiently small relative to the elasticity of profits.
•
This excludes a wide range of production technologies
including the commonly assumed case of isoelastic production
functions.
a framework (11)
» wage-bargaining when the firm has no product market power «
E.g. Cobb-Douglas technology in the single factor case
Y ( N )  AN
[1 ] / 
  1

1
N ( w)  Bw
D
 ( w)  C w
 1
NN
D
ww
N wDˆ
 [ N ]   [ w B ]  0
D
2
w
wˆ Nwˆ

 1  0
N 
a framework (12)
» wage-bargaining when the firm has no product market power «
•
Therefore, for a wide range of production functions
dw
dw
 [1  t ]
1  0
d
d
•
dN
dw
 N wD
0
d
d
In sum, assuming wage bargaining, Maribel subsidies are
expected to increase full-time manual employment under
standard assumptions about production technologies.
a framework (13)
» wage-bargaining when the firm has product market power «
•
•
So far we have looked at conditions imposed on production
technologies for employment subsidies to increase
employment assuming labor markets are imperfectly
competitive.
But there imperfect competition on output markets too in the
data examined below. In particular, a common assumption is
that of monopolistic competition assuming that each takes the
actions of other firms as given.
a framework (14)
» wage-bargaining when the firm has product market power «
The Nash-bargain is now given by:
  log  N D ( w)[U ( w)  U ]





(18) max 

D
D
D
w
[1   ]log  p(Y ( N ( w))Y ( N ( w))  wN ( w)  

 

where
D
N ( w)
is implicitly given by
w  p(Y ( N ))YN ( N )[1  pY (Y ( N )) p(Y ( N )) Y ( N )]
a framework (15)
» wage-bargaining when the firm has product market power «
•
In line with the case where the firm is a price taker,
employment subsidies decrease employment only if:
(19)
D
D 2
 F ( w, )
 [1  t ] 


 
N
N
ww  N w
2
  

N 
[1   ]
•
[1  t ]N
w
[N
D
w
w Nw

]0
N

This excludes a wide range of production technologies
including the commonly assumed case of isoelastic production
technologies and isoelastic product demand.
a framework (16)
» wage-bargaining when the firm has product market power «
E.g. Cobb-Douglas production technologies and isoelastic
product demand in the single factor case
Y ( N )  AN
[1 ] / 
 ( w)  C w
N ( w)  Bw
D
NN
1 '

D
 '   /[1     ]  1
 1
D
 [ N ]   [ w B ]  0
2
ww
  1
  1
2
w
D
N w / N  N w /   [  1   ] /[1     ]  0
2
w
a framework (17)
» wage-bargaining when the firm has product market power «
In sum, under realistic assumptions about production
technologies and product demand, Maribel subsidies are
expected to increase full-time manual employment:
dw
dw
 [1  t ]
1  0
d
d
D dw
dN
 Nw
0
d
d
d
dw
 N
0
d
d
D dw
dp
 YpY YN N w
0
d
d
presentation outline
1. a framework
2. the history of Maribel
3. data
4. empirical analysis
5. conclusions
the history of Maribel (1)
Table 1: The history of Maribel
Period
Type of subsidy
Per-worker subsidy is based on
Maribel I
01/1983-09/1993
lump-sum subsidy per fulltime manual worker
firm size, excluded industry
or not
Maribel II/III
09/1993-06/1997
lump-sum subsidy per fulltime manual worker
firm size, excluded industry or
not, target industry or not
Maribel IV
06/1997-04/1999
lump-sum subsidy per fulltime manual worker
firm size, excluded industry or
not, fraction of full-time
manual workers
Structural employer tax
exemptions and group
reductions
04/1999- present
lump-sum and wage subsidies
for all employees
wage, target group or not
the history of Maribel (2)
Table 2: Maribel II/III
Manual workers
Non-manual workers
First 5 in small firms
(<20 employees)
Other manual workers
Target industries
37 200
33 748
0
Other industries (not
excluded)
12 000
7 500
0
Excluded industries
0
0
0
the history of Maribel (3)
Table 3: Maribel IV
Manual workers
X<0.66
X>=0.66
Excluded industries
Non-manual workers
First 5 in small firms
(<10 employees)
Other manual workers
34 000 + 20 000*X
20 000 + 20 000*X
0
34 000 + 20 000*0.66
20 000 + 20 000*0.66
0
0
0
0
presentation outline
1. a framework
2. the history of Maribel
3. data
4. empirical analysis
5. conclusions
data (1)
•
BELFIRST: a panel of company accounts for the period 19951999
•
Header and balance sheet: firm identifier, industry classification,
average annual employment at the firm
•
Social balance sheet: total full-time, full-time manual, part-time
manual and full-time non-manual employment on 31/12,
annual hours worked by full-time workers, average annual fulltime employment, average annual part-time employment and
annual Maribel subsidy received by the firm
data (2)
Table 4: Comparing BELFIRST
Number of Maribel workers
Maribel subsidy
Belfirst (1996)
RSZ (1995)
Belfirst (1996)
RSZ (1995)
Mining and quarrying
0.62
0.34
0.67
0.49
Manufacturing
51.94
50.62
73.59
74.44
Electricity, gas and water
0.01
0.00
0.01
0.00
Construction
17.49
15.91
7.22
6.50
Wholesale and retail trade
12.95
10.96
7.40
4.88
Hotels and restaurants
2.92
3.85
1.04
1.62
Transport and communication
7.17
6.85
7.19
7.96
Financial intermediation
0.03
0.01
0.02
0.01
Business services
5.48
6.48
2.28
2.24
Public administration
0.00
0.00
0.00
0.00
Education
0.00
0.00
0.00
0.00
Health and social work
0.05
3.14
0.02
1.07
Public services
1.27
1.80
0.49
0.74
Private households
0.00
0.01
0.00
0.00
430 101
788 908
8 688
18 053
Total
data (3)
Table 5: Subsidized and non-subsidized firms in BELFIRST
Subsidized firms
Non-subsidized firms
Number of
firms
FT
employment
FT manual
employment
Number of
firms
FT
employment
FT manual
employment
1996
20 635
27.3
18.7
13 003
7.94
4.78
1997
27 644
28.05
19.04
9 869
8.59
4.90
1998
32 517
22.79
15.46
9695
9.07
5.28
1999
22 827
30.02
20.66
23 852
7.14
4.12
data (4)
Table 6: Firm level Maribel subsidies in BELFIRST
Subsidy per
manual worker
Total subsidy
Total subsidy as %
of total labor costs
Maribel II/III
1996
19 724
(12 682)
421 090
(2 367 444)
1.61
(1.83)
Maribel II/III and Maribel IV
1997
24 183
(10 390)
428 943
(2 096 685)
2.15
(2.26)
Maribel IV
1998
29 784
(9 561)
454 941
(2 016 944)
2.64
(2.88)
Maribel IV and grouped employer tax exemptions
1999
15 840
(12 658)
299 425
(1 806 779)
1.33
(2.31)
data (5)
500
1000
1500
2000
Figure 2: Actual and predicted total subsidies for Maribel II/III in 1996
0
10
20
30
number of full-time manual workers
small/target
small/other
large/target
large/other
40
50
data (6)
0
500
1000
1500
2000
Figure 2 (cont.): Actual and predicted total subsidies for Maribel IV in 1998 given that X>0.66
0
10
20
30
number of full-time manual workers
small firms
large firms
40
50
presentation outline
1. a framework
2. the history of Maribel
3. data
4. empirical analysis
5. conclusions
empirical analysis (1)
•
•
•
•
The aim of this section is to derive treatment-on-the-treated
effects of Maribel subsidies on full-time manual employment.
Since Maribel has been an uncontrolled experiment, one has to
make choices about how to construct counterfactuals.
This section uses the different possibilities with the data at
hand applying DID, matching and IV estimators
In line with the theory presented above, it will be argued that
Maribel subsidies have increased full-time manual employment
indeed.
empirical analysis (2)
•
•
Difference-in-differences estimates compare the within-firm
variation in employment between firms switching Maribel
participation and firms not switching Maribel participation.
Combining years 1996-1999 allows us to apply the fixedeffects estimator to the following functional form:
(21)
•
nit  0  1 DSi 96   2 DSi 97  3 DSi 98
  4 DSi 99  5 ' YEARt   i   it
Allowing for an arbitrarily different time trend for firms
having ever received Maribel subsidy does not change the
difference-in-differences estimates
empirical analysis (3)
Table 7: Difference-in-differences estimates of the employment impact of
Maribel subsidies
Log( all FT
workers)
Log(nonmanual FT
workers)
Received Maribel in 1996
0.084
(0.004)
-0.000
(0.006)
0.105
(0.004)
0.083
(0.006)
Received Maribel in 1997
0.116
(0.004)
0.026
(0.007)
0.126
(0.004)
0.081
(0.007)
Received Maribel in 1998
0.089
(0.004)
0.022
(0.007)
0.098
(0.005)
0.075
(0.007)
Received Maribel in 1999
0.071
(0.003)
0.042
(0.005)
0.078
(0.004)
0.060
(0.005)
Dummy for 1997
-0.003
(0.004)
0.023
(0.007)
0.000
(0.005)
0.012
(0.007)
Dummy for 1998
0.008
(0.005)
0.020
(0.008)
0.012
(0.005)
0.008
(0.007)
Dummy for 1999
0.068
(0.004)
0.037
(0.006)
0.070
(0.004)
0.039
(0.004)
-
-
0.396
(0.004)
Log(non-manual FT
workers)
-
Log(manual FT workers)
empirical analysis (4)
•
•
•
the estimated coefficients are in line with the prediction that
under standard assumptions about labor and product markets,
Maribel subsidies increase full-time manual employment
The estimated effects are relatively large suggesting that
Maribel subsidies created at least between 56 000
(0.060x20.66x22827x2 for 1999) and 85 000
(0.080x19.04x27644x2 for 1998) jobs or about 2 percent of
economy wide employment.
But this is not to say that these effects would be accurate
estimates if the government were to double the number of
firms entitled to receive benefits since these are treatment-onthe-treated effects.
empirical analysis (5)
Table 8: The impact of Maribel subsidies on alternative employment measures
Hours worked by
FT workers
Average FT
employment
Average PT
employment
Received Maribel in 1996
0.098
(0.004)
0.098
(0.003)
0.015
(0.009)
Received Maribel in 1997
0.127
(0.005)
0.110
(0.004)
0.018
(0.010)
Received Maribel in 1998
0.117
(0.005)
0.103
(0.004)
0.015
(0.010)
Received Maribel in 1999
0.111
(0.004)
0.079
(0.003)
0.037
(0.007)
Dummy for 1997
0.004
(0.005)
-0.006
(0.004)
0.064
(0.010)
Dummy for 1998
-0.002
(0.005)
0.019
(0.004)
0.067
(0.010)
Dummy for 1999
0.063
(0.004)
0.101
(0.003)
0.106
(0.008)
empirical analysis (6)
•
•
•
Fixed-effects estimates reported above allow for unobserved
time persistent firm characteristics such as time averaged firm
size to be correlated with Maribel participation.
But if, for example, smaller firms are likely to grow faster, the
estimated difference-in-differences presented above will be
downward biased (given that smaller firms are less likely to
receive Maribel subsidies).
A solution to this problem is to draw a sample from the group
of non-receivers that better resembles the treatment group for
example in terms of beginning-of-year full-time manual
employment.
empirical analysis (7)
Table 9: Matching estimates of the employment impact of Maribel subsidies
Panel A: Fixed-effects estimates for log(manual FT workers) using different counterfactual
samples stratified by quartiles of initial full-time manual employment
>1st quartile
>2nd quartile
>3th quartile
Received Maribel in 1997
0.031
(0.008)
0.048
(0.010)
0.077
(0.012)
Received Maribel in 1998
0.069
(0.007)
0.077
(0.009)
0.094
(0.011)
Received Maribel in 1999
0.105
(0.005)
0.138
(0.006)
0.150
(0.007)
T-test statistic for difference in
initial mean full-time manual
employment
5.27 (1997)
4.42 (1998)
17.69 (1999)
1.93 (1997)
1.79 (1998)
9.17 (1999)
-1.67 (1997)
-2.49 (1998)
4.20 (1999)
Panel B: Average treatment-on-the-treated effect for log(manual FT workers) using propensity
score matching on initial full-time manual employment
Received Maribel
Optimal number of blocks
1997
1998
1999
0.132
(0.013)
0.099
(0.012)
-
10
7
-
empirical analysis (8)
•
•
•
•
The analysis so far has used whether or not firms received
Maribel subsidies as the explanatory variable (variation in
Maribel subsidies at the extensive margin).
But receiving firms also differ in the amount of per-worker
subsidy received in any given year (variation in Maribel
subsidies at the intensive margin).
However, using the amount of Maribel subsidy as an
explanatory variable introduces measurement error as was
argued above. This will bias the estimated impact towards 0.
One possible solution to this problem is to apply a 2SLS
estimator using the legal information as an instrument.
empirical analysis (9)
•
•
Consider the following second-stage equation of interest:
Ni1998   0   1Si1998   2 Ni1997   3 X i1997   i1998
(22)
To deal with measurement error in S and the possible
endogeniety between S and N, consider the following firststage:
Si1998  1[ X  0.66; N  10; M  5]( 1   2 X ) M
(23)
1[ X  0.66; N  10; M  5]( 3   4 X  ( 5   6 X )( M  5))
1[ X  0.66; N  10]( 7   8 X ) M
1[ X  0.66; N  10; M  5]( 9   10 0.66) M
1[ X  0.66; N  10; M  5]( 11   12 0.66  ( 13   14 0.66)( M  5))
1[ X  0.66; N  10]( 15   16 X ) M  i1998
where all right-hand-side variables are taken in 1997.
empirical analysis (10)
Table 10: 2SLS estimates using the group of firms
receiving Maribel subsidies in 1998
FT manual workers
Total Maribel subsidy received in 1998
(in thousands BEF)
Fraction of manual workers in 1997
elasticity derived at means
PT manual workers
0.033
(0.014)
0.032
(0.014)
0.00
(0.00)
0.00
(0.00)
No
Yes
No
Yes
0.063
0.062
0.00
0.00
Notes: All regressions include a lagged dependent variable.
empirical analysis (11)
•
•
•
Under realistic assumptions about the nature of labor and
product markets, Maribel subsidies are expected to increase
full-time manual employment.
At the extensive margin, it was shown that firms receiving
subsidies created more jobs compared to firms non-receivers
using difference-in-differences and matching estimators
indeed.
Also using variation at the intensive margin showed that
among receivers the creation of low-skilled jobs is bigger the
bigger is the subsidy.
empirical analysis (12)
•
Note that under standard assumptions about production
technologies and product demand, the impact of Maribel
subsidies is positive independent of who has the bargaining
power:
D
D 2
 F ( w, )
 [1  t ] 

  [1   ] [1  t ]N [ N wD w  N w ]  0
 
N
N

N
ww
w

 

N 2 
N

w
•
It can also be shown that the impact of Maribel subsidies is
expected to be bigger the more elastic is product and therefore
labor demand.
empirical analysis (13)
.2
Figure 3: The employment impact of Maribel subsidies and union-bargaining power
in manufacturing industries
Motor vehicles
.15
Basic metals
Radio,
television and comm.
Textiles
Wearing apparel
Machinery
.1
Furniture and manuf. nec
Electrical machinery
Medical eq. and optical instr.
Fabricated
metals
Rubber and plastic
Mineral products
.05
Chemicals
Food and beverages
Wood products
Pulp and paper productsPublishing and printing
.075
.1
DID coefficient
.125
.15
union-bargaining strength
.175
.2
OLS prediction at mean import penetration
empirical analysis (14)
.2
Figure 4: The employment impact of Maribel subsidies and import penetration
in manufacturing industries
Motor vehicles
.15
Basic metals
Radio, television and comm.
Wearing apparel
Textiles
Machinery
.1
Furniture and manuf. nec
Electrical machinery
Medical eq. and optical instr.
Fabricated metalsRubber and plastic
Mineral products
Chemicals
.05
Food and beverages
Wood products
Publishing and printing
.2
.3
.4
DID coefficient
Pulp and paper products
.5
.6
.7
import penetration
.8
.9
1
OLS prediction at mean union-bargaining strength
conclusions (1)
•
•
•
The question we started from was whether or not payroll tax
subsidies are likely to increase wage flexibility and therefore
employment?
We developed a framework to show that lump-sum
employment subsidies are expected to increase employment
under realistic assumptions about labor and product markets.
We used different sources of variation in firm level panel data
exploited by different estimators to show that Maribel
subsidies increased low-skilled manual employment by at least
about 2 percent of the working population.
conclusions (2)
•
•
•
But this is not to say that employment subsidies for low-skilled
workers are a policy necessarily sustainable in the long-run.
New cohorts of low-skilled workers should be educated or
trained to do different jobs than they do today. Fine-tune our
educational system to the needs of jobs in those sectors in
which advanced countries aim to maintain a comparative
advantage.
Invest in R&D to generate exports in selected high-tech
industries in which advanced countries aim to maintain a
comparative advantage and provide the skills needed to do
these jobs.