Effect of Subsidizing the First Employee - Evidence from Finland Background Report for Economic Policy Council Report 2016
Annika Nivala
https://urn.fi/URN:NBN:fi-fe2021042717907
Tiivistelmä
This paper
studies the effects of the first employee employment subsidy that was in force
in Finland from 2007 to 2011. Businesses that had no employees in the previous
12 months could receive the subsidy to hire the first employee. The subsidy was
granted by the ELY center from application and amounted to 30% of the wage
costs for the first year and 15% for the second year excluding payroll taxes.
The employment contract had to be permanent and for at least 25 hours per week.
The subsidy was first available in a few high unemployment municipalities in
northern and eastern Finland, but was extended to cover a large share of
municipalities in 2008 and small areas were added in 2009 and 2010. The areas
added to the subsidy area from 2008 onward included economically average areas
in addition to worse performing areas.
The subsidy
was supposed to encourage non-employer firms to become employers. Becoming an
employer is not a trivial step for a firm: there are fixed costs in becoming an
employer for the first time both naturally and due to bureaucracy (such as
learning the legal responsibilities of an employer), and it generally implies a
relatively large increase in business activity that may require large
investment and increase in risk. Actually, more than half of Finnish companies
are non-employer firms. Consequently, political discussion has suggested that
there is large employment potential in non-employer firms. However, the special
case of non-employer firms and the determinants of becoming an employer have not
yet received much attention in economic literature. Therefore, there is no
evidence on the effectivity of such subsidies yet.
Using tax
register data of all Finnish companies from 2000 to 2013, I study the effects
of the subsidy on the probability of becoming an employer using a
Difference-in-Differences framework. The analysis is restricted to the border
of the subsidy area to exclude the largest regional differences in economic
trends. The change in the rate of becoming an employer in the subsidy area is compared
to the change in the control area. Therefore, the treatment area is the
municipalities on the border of the subsidy area where the subsidy is
available. Correspondingly, the control area is the municipalities on the
border of the subsidy where the subsidy is not available i.e. the neighboring
municipalities of the treatment area. Comparisons of pre-treatment trends
suggest that the common trends assumption is not violated and
difference-in-differences can be used. Placebo regressions are also conducted
and they do not raise serious concerns about the validity of the method.
To identify
the effect on non-employer firms, I restrict the analysis to firms that have
zero employees in the year before the subsidy period and follow whether they
became employers in the subsidy period. Similarly, in the pre-subsidy period,
i.e. the four years before the subsidy, the firms that had zero employees in
the previous year are included. Here, only the areas where the subsidy became
available in 2008 and the corresponding control area are included (i.e.
neighboring municipalities of the 2008 treatment municipalities where the
subsidy is never available). Therefore, in the subsidy period i.e. 2008–2011
firms that have zero employees in 2007 are included and in 2004–2007 firms that
have zero employees in 2003 are included. Then, I do simple Diff-in-Diff
regressions using a Dummy for being an employer by the first, second, third or
fourth year as the outcome variable. In short, I study whether the subsidy
affected the rate of becoming an employer in a span of four years.
The results
suggest that there is no significant effect on the hiring probability. This
result does not change when the analysis is restricted to groups of firms that
are more likely to hire: firms excluding sole proprietorships, new firms or
VAT-liable firms (firms that have a turnover of more than 8,500 euros). In
addition, I estimate the effect on hiring probability using a proportional
hazards model where firms at risk of hiring the first employee are defined as
those that had zero employees in the previous year. This approach enables me to
account for the time in which a firm has been a non-employer. These results
support the conclusions from the simple Diff-in-Diff regressions that the
subsidy did not increase hirings.
In addition
to the effect on non-employer firms, the subsidy can affect the overall
probability to become an employer firm as it encourages starting a business, or
may discourage exiting, as well as encourages existing non-employer firms to
hire. However, this effect is much more difficult to study because there is no
clear target group in the data. This question is studied here using data
aggregated to the municipality*industry level where the outcome variable of
interest is the number of firms. These results do not suggest that the subsidy
significantly affected the number of firms. Using, for example, the number of
employer or non-employer firms as the outcome variables does not change the
results. Therefore, no effect at the exit/entry margin is found.
The results, therefore, suggest that
the first employee subsidy did not have a significant effect on existing
non-employer firms or at the firm exit/entry margin. The estimates are also
precise, except in some subgroups, implying that labor demand elasticity of
non-employer firms is very small. The results are robust across different firm
groups, so the elasticity is not very different between, for example, all firms
and new firms. The results can be due to non-employer firms consisting mainly
of self-employed people who are not responsive to hiring incentives so that the
affected group of firms is really small. If there are large constraints in
becoming an employer that may cause many firms to remain non-employers and the
subsidy can help them overcome these constraints, the subsidy should increase
the probability of becoming an employer significantly. Thus, the results imply
that either the constraints were not significant or the subsidy was not
effective in abolishing them. The ineffectiveness of the subsidy can be due to
poor implementation and design – the payment and application process included
some bureaucracy and firms were not well informed about the subsidy, which may
be a reason for the low participation rate.
Kokoelmat
- Rinnakkaistallenteet [19207]