The Effects of Subsidizing Social Security Contributions on Firms and Workers

Talk by Güneş Aşık (TOBB University of Economics and Technology, Ankara) as part of the Research Seminar Series of the IOS Economics Department.

This paper examines the impacts of a large employment subsidy scheme covering part of employers’ social security contributions on firms and workers in Turkey. To identify causal effects, it exploits the geographically targeted implementation of the subsidy, combined with a unique reclassification of non-treated areas into treated ones in the post-estimation period, in a difference-in-difference setting. It uses rich employer-employee-linked administrative data to closely follow the dynamics of firms and workers before and after the subsidy implementation. The paper finds that the subsidy had large positive impacts on registered employment. Corroborative evidence suggests that the effects were partly driven by the formalization of existing workers as opposed to new job creation. Eligibility to the subsidy scheme also raised registered employment at the extensive margin by increasing firm entry and reducing the likelihood of firm exit. At the worker level, it significantly increased the likelihood that workers enter formal employment for the first time while reducing the probability that they exit it. Positive effects on formal employment are concentrated in medium-skilled occupations as opposed to low and high-skilled ones.