Maarten Goos and Joep Konings (KUL)

The impact of employment subsidies on job creation: non-experimental evidence

using firm level data

Maarten Goos and Joep Konings (KUL)

preliminary

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 short-run?

motivation (3)Macro-economic papers Micro-economic papers

Th

eory a

nd

cross-co

un

try or tim

e se

ries e

viden

ce

-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

-eco

nom

etric e

viden

ce

-----

-Few papers using firm level panel data. Crepon and Desplatz [2002] use French matched employer-employee 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 non-experimental 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)

with t the proportional marginal payroll tax and

the lump-sum employment subsidy.

• (2) and

(3) and

( , , ) [1 ]w w T w t w t

( , , )w

T w tT t

w

( , , )

1T w t

T

0www

TT

w

0w

w

TT

a framework (3)

» when the firm has no product and no labor market

power «

• A group of homogeneous firms maximizes profits:

(4) with p possibly different from

the economy wide aggregate price index normalized to

unity and such that and

.

• (5) which for given p implicitly defines

the unconditional demand for labor function.

max ( )N

pY N wN

( ) ( ) 0NY N Y N N 2 2( ) ( ) 0NNY N Y N N

( )NY N w p

a framework (4)

» when the firm has no product and no labor market

power «

• Unconditional labor demand is given by:

(6) with

• Uncompensated labor supply is given by:

(7) with

• Setting (6) = (7) solves for employment and wages:

(8)

( )DN w

( )

( ) 0D

D

w

N wN w

w

( )SN w ( )( ) 0

SSw

N wN w

w

( [1 ] ) ( )D SN w t N 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:

(9)

(10) and

• Maribel subsidies are expected to increase full-time manual employment if labor and product markets are perfectly competitive

[1 ] 1 0[1 ]

Sw

D Sww

Ndw dwt

d d N t N

0D

w

dN dwN

d d

0

d dwN

d d

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)

with .

log ( ) [ ( ) ]max

[1 ]log ( ( )) ( )

D

w D D

N w U w U

pY N w wN w

0 1

a framework (7)

» wage-bargaining when the firm has no product

market power «

• It must be true in equilibrium that: (13)

• The impact of employment subsidies on the pre-

tax wage is:

(14)

[1 ] ( )( ) [1 ] ( )

( , ) [1 ] 0( ) ( ) ( )

D

w w

D

t N wU w t N wF w

U w U N w w

( , )

( , )

dw F w

d F w w

a framework (8)» wage-bargaining when the firm has no product market power «

• Remember from (9) and (10) that

and

• An increase in employment subsidies decreases employment if

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).

[1 ] 1

dw dwt

d d

D

w

dN dwN

d d

dw d

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

• Given the concavity of the Nash-bargain in pre-tax wages, this implies employment subsidies decrease employment only if:

(16)

2

2

ˆ

( , ) [1 ]

ˆ ˆ[1 ][1 ] 0

ˆ

D D

ww w

Dw

F w tNN N

Nt N w Nw

Nw N

( , )0

( , )

dw F w

d F w w

a framework (10)


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)


market power «[1 ] /

( )Y N AN

1

( )D

N w Bw

1

( )w Cw

1

2

[ ] [ ] 0D D

w w w

NN N w B

ˆ

ˆ ˆ1 0D

w

w NwN

N

E.g. Cobb-Douglas technology in the single factor case

a framework (12)

» wage-bargaining when the firm has no product market

power «

• Therefore, for a wide range of production functions

• In sum, assuming wage bargaining, Maribel

subsidies are expected to increase full-time manual

employment under standard assumptions about

production technologies.

[1 ] 1 0

dw dwt

d d

0D

w

dN dwN

d d

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)


market power «

The Nash-bargain is now given by:

(18)

where is implicitly given by

log ( )[ ( ) ]max

[1 ]log ( ( ( )) ( ( )) ( )

D

D D Dw

N w U w U

p Y N w Y N w wN w

( )D

N w

( ( )) ( )[1 ( ( )) ( ( )) ( )]N Yw p Y N Y N p 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)

• This excludes a wide range of production technologies including the commonly assumed case of isoelastic production technologies and isoelastic product demand.

2

2

( , ) [1 ]

[1 ][1 ] [ ] 0

D Dww w

Dw

F w tNN N

N

t N w NwN

Nw

a framework (16)


market power «

E.g. Cobb-Douglas production

technologies and isoelastic product demand

in the single factor case

[1 ] /( )Y N AN

1

( )D

N w Bw

1 '

( )w Cw

' /[1 ] 1

12 2

[ ] [ ] 0D D

w w wN N N w B

2

/ / [ 1 ] /[1 ] 0D

wN w N Nw

1

a framework (17)


market power «

In sum, under realistic assumptions about

production technologies and product demand,

Maribel subsidies are expected to increase full-

time manual employment:

[1 ] 1 0

dw dwt

d d

0

Dw

dN dwN

d d

0

d dwN

d d

0DwY N

dp dwYp Y N

d d


1. a framework


3. data


5. conclusions

the history of Maribel (1)

Period Type of subsidy Per-worker subsidy is based on

Maribel I 01/1983-09/1993 lump-sum subsidy per full-time manual

worker

firm size, excluded industry or not

Maribel II/III 09/1993-06/1997 lump-sum subsidy per full-time manual

worker

firm size, excluded industry or not, target

industry or not

Maribel IV 06/1997-04/1999 lump-sum subsidy per full-time 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

Table 1: The history of Maribel


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


Table 3: Maribel IV

Manual workers Non-manual workers

First 5 in small firms

(<10 employees)

Other manual workers

X<0.66 34 000 + 20 000*X 20 000 + 20 000*X 0

X>=0.66 34 000 + 20 000*0.66

20 000 + 20 000*0.66

0

Excluded industries

0 0 0


1. a framework


3. data


5. conclusions

data (1)

• BELFIRST: a panel of company accounts for the period 1995-1999

• 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 full-time employment, average annual part-time employment and annual Maribel subsidy received by the firm

data (2)

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

Total 430 101 788 908 8 688 18 053

Table 4: Comparing BELFIRST

data (3)Table 5: Subsidized and non-subsidized firms in BELFIRST

Subsidized firms Non-subsidized firms

Number of firms

FT employme

nt

FT manual employmen

t

Number of firms

FT employmen

t

FT manual employmen

t

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)Figure 2: Actual and predicted total subsidies for Maribel II/III in 1996

500

1000

1500

2000

tota

l sub

sid

y (t

hous

and

s B

EF

)

0 10 20 30 40 50number of full-time manual workers

small/target large/targetsmall/other large/other

data (6)Figure 2 (cont.): Actual and predicted total subsidies for Maribel IV in 1998 given that X>0.66

050

010

0015

0020

00to

tal s

ubsi

dy

(in

thou

san

d B

EF

)

0 10 20 30 40 50number of full-time manual workers

small firms large firms


1. a framework


3. data


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.


• 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 fixed-effects estimator to the following functional form:

(21)

• Allowing for an arbitrarily different time trend for firms having ever received Maribel subsidy does not change the difference-in-differences estimates

0 1 96 2 97 3 98

4 99 5 'it i i i

i t i it

n DS DS DS

DS YEAR

Table 7: Difference-in-differences estimates of the employment impact of Maribel subsidies

Log( all FT workers)

Log(non-manual FT workers)

Log(manual FT workers)

Received Maribel in 1996

0.084(0.004)

-0.000(0.006)

0.105(0.004)

0.083(0.006)


0.116(0.004)

0.026(0.007)

0.126(0.004)

0.081(0.007)


0.089(0.004)

0.022(0.007)

0.098(0.005)

0.075(0.007)


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)

Log(non-manual FT workers)

- - - 0.396(0.004)



• 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-on- the-treated effects.

Table 8: The impact of Maribel subsidies on alternative employment measures

Hours worked by FT workers

Average FT employment

Average PT employment


0.098(0.004)

0.098(0.003)

0.015(0.009)


0.127(0.005)

0.110(0.004)

0.018(0.010)


0.117(0.005)

0.103(0.004)

0.015(0.010)


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)



• 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.

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


0.031(0.008)

0.048(0.010)

0.077(0.012)


0.069(0.007)

0.077(0.009)

0.094(0.011)


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

1997 1998 1999

Received Maribel 0.132(0.013)

0.099(0.012)

-

Optimal number of blocks

10 7 -



• 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.


• Consider the following second-stage equation of interest:(22)

• To deal with measurement error in S and the possible endogeniety between S and N, consider the following first-stage:

(23)

where all right-hand-side variables are taken in 1997.

1998 0 1 1998 2 1997 3 1997 1998i i i i iN S N X

1998 1 2

3 4 5 6

7 8

9 10

11 12 13 14

1[ 0.66; 10; 5]( )

1[ 0.66; 10; 5]( ( )( 5))

1[ 0.66; 10]( )

1[ 0.66; 10; 5]( 0.66)

1[ 0.66; 10; 5]( 0.66 ( 0.66)( 5))

1[ 0.66; 10](

iS X N M X M

X N M X X M

X N X M

X N M M

X N M M

X N

15 16 1998) iX M

empirical analysis (10)Table 10: 2SLS estimates using the group of firms

receiving Maribel subsidies in 1998

FT manual workers PT manual workers

Total Maribel subsidy received in 1998 (in thousands BEF)

0.033(0.014)

0.032(0.014)

0.00(0.00)

0.00(0.00)

Fraction of manual workers in 1997

No Yes No Yes

elasticity derived at means 0.063 0.062 0.00 0.00

Notes: All regressions include a lagged dependent variable.


• 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.

• 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:

• 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.

2

2

( , ) [1 ] [1 ][1 ] [ ] 0

D D Dww w w

F w t t N w NwNN N N

N Nw


empirical analysis (13)Figure 3: The employment impact of Maribel subsidies and union-bargaining power

in manufacturing industries

Food and beverages

Textiles Wearing apparel

Wood products

Pulp and paper productsPublishing and printing

Chemicals

Rubber and plastic Mineral products

Basic metals

Fabricated metals

Machinery

Electrical machinery

Radio, television and comm.

Medical eq. and optical instr.

Motor vehicles

Furniture and manuf. nec

.05

.1.1

5.2

DID

coe

ffici

ent f

or

Ma

ribel

su

bsid

y

.075 .1 .125 .15 .175 .2union-bargaining strength

DID coefficient OLS prediction at mean import penetration


Figure 4: The employment impact of Maribel subsidies and import penetrationin manufacturing industries

Food and beverages

Textiles Wearing apparel

Wood products

Pulp and paper productsPublishing and printing

Chemicals

Rubber and plasticMineral products

Basic metals

Fabricated metals

Machinery

Electrical machinery

Radio, television and comm.

Medical eq. and optical instr.

Motor vehicles

Furniture and manuf. nec

.05

.1.1

5.2

DID

coe

ffici

ent f

or

Ma

ribel

su

bsid

y

.2 .3 .4 .5 .6 .7 .8 .9 1import penetration

DID coefficient 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.

Maarten Goos and Joep Konings (KUL)

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