Payroll Tax Reductions: Incidence on Employment, Wages and Firm Performance.

01 January 2021 → 31 December 2024
Research Foundation - Flanders (FWO)
Research disciplines
  • Social sciences
    • Labour and demographic economics
    • Econometric and statistical methods and methodology
    • Micro-based behavioural economics
wage subsidies wage incidence effects on employment firm performance small firms
Project description

Creating jobs and supporting small businesses are popular policy objectives. Belgium’s permanent exemption of social security contributions for the first employee introduced in 2016 aims at achieving both objectives. Exploiting this unusually generous (and expensive) policy, this research project aims at understanding how workers and firms respond to permanent wage subsidies in the short as well as medium term. Building on a theoretical model and relying on advanced micro-econometric methods, we first empirically test whether this policy created jobs and/or increased firms’ investment and profits. Next, we examine how the subsidies are shared between the first employee and the employer, thereby testing the canonical tax incidence model which predicts that wage subsidies are fully passed on to workers. Finally, the policy’s impact on the firm size distribution is assessed, allowing us to examine whether the policy destroyed jobs in larger firms that do not benefit from the subsidies. We hope that this research project can contribute to gaining insights in the distributional consequences of permanent wage subsidies.