TY - JOUR

T1 - Do employment subsidies work? Evidence from regionally targeted subsidies in Turkey

AU - Betcherman, Gordon

AU - Daysal, N. Meltem

AU - Pagés, Carmen

PY - 2010/8

Y1 - 2010/8

N2 - This paper studies the effects on registered employment and number of registered establishments of two employment subsidy schemes in Turkey. We implement a difference-in-differences methodology to construct appropriate counterfactuals for the covered provinces. Our findings suggest that both subsidy programs did lead to significant net increases in registered jobs in eligible provinces (5%-13% for the first program and 11%-15% for the second). However, the cost of the actual job creation was high because of substantial deadweight losses, particularly for the first program (47% and 78%). Because of better design features, the second subsidy program had lower, though still significant, deadweight losses (27%-46%). Although constrained by data availability, the evidence suggests that the dominant effect of subsidies was to increase social security registration of firms and workers rather than boosting total employment and economic activity. This supports the theory that in countries with weak enforcement institutions, high labor taxes on low-wage workers may lead to substantial incentives for firms and workers to operate informally.

AB - This paper studies the effects on registered employment and number of registered establishments of two employment subsidy schemes in Turkey. We implement a difference-in-differences methodology to construct appropriate counterfactuals for the covered provinces. Our findings suggest that both subsidy programs did lead to significant net increases in registered jobs in eligible provinces (5%-13% for the first program and 11%-15% for the second). However, the cost of the actual job creation was high because of substantial deadweight losses, particularly for the first program (47% and 78%). Because of better design features, the second subsidy program had lower, though still significant, deadweight losses (27%-46%). Although constrained by data availability, the evidence suggests that the dominant effect of subsidies was to increase social security registration of firms and workers rather than boosting total employment and economic activity. This supports the theory that in countries with weak enforcement institutions, high labor taxes on low-wage workers may lead to substantial incentives for firms and workers to operate informally.

KW - Deadweight loss

KW - Employment subsidies

KW - Formalization

KW - Social security contributions

UR - http://www.scopus.com/inward/record.url?scp=77953543452&partnerID=8YFLogxK

U2 - 10.1016/j.labeco.2009.12.002

DO - 10.1016/j.labeco.2009.12.002

M3 - Journal article

AN - SCOPUS:77953543452

VL - 17

SP - 710

EP - 722

JO - Labour Economics

JF - Labour Economics

SN - 0927-5371

IS - 4

ER -