Research

WORKING PAPERS

Too much of a good thing? The welfare costs of massive firm entry with Sam Desiere and Gert Bijnens

Abstract:  Policies supporting small businesses are popular among policymakers but often criticised by economists for their potential to distort the economy. This paper provides a comprehensive evaluation of a unique policy that subsidises the first employee. Empirically, we find that the policy led to a surge in the number of firms employing exactly one employee, without a noticeable effect on the number of firms with two or more employees. A simple frictionless general equilibrium model of occupational choices predicts the empirical facts remarkably well. Leveraging our model, we show that the general equilibrium effects on wages and aggregate output are likely to be small. However, the policy is expensive. Our findings support the traditional view that size-dependent subsidies distort the optimal allocation of resources.

WORK IN PROGRESS 

[JMP] In-work benefits and eligibility based on wage rates: the effects on time worked

Abstract:  This paper investigates the impact of introducing the Social Work Bonus (SWB), a payroll tax reduction for low-wage individuals in salaried employment in Belgium. The SWB differs from other in-work benefits aimed at enhancing work incentives because it specifically targets individuals with a low-wage rate rather than those with low labour earnings. This approach prevents part-time traps, where individuals may reduce their working time to qualify for in-work benefits or may not increase their working time to avoid losing the benefits. Using individual administrative panel data and a difference-in-differences estimation strategy, we observe a relatively large increase in the quarterly number of days worked for young salaried employees with a part-time contract. No such effect is found for older employees or those on full-time contracts. These findings indicate that, for certain subgroups of the population, in-work benefits targeted at the wage rate can lead to a significant increase in working time.

Permanent exemption from social security contributions: The role of hiring frictions with Sam Desiere, Rigas Oikonomou, Bruno Van der Linden, and Gert Bijnens

Abstract:  Since 2016, Belgium has permanently exempted new employers from paying payroll taxes on the gross wage of one of their employees. This paper explains why the reform has resulted in a substantial increase in firms with only one employee but has had a much more limited impact on the stock of larger firms. By building a directed search model, we find that the exemption helps firms that were not hiring before the reform to become employers. However, unless their productivity increases over time – which occurs only for a minority of these firms – hiring more than one employee is not profitable for them. Similarly, few agents who would have hired even without the exemption respond to the policy, as the benefit of attracting more jobseekers, thanks to the exemption, is relatively minor compared to the additional wage costs. We also find that the wage increase in general equilibrium caused by the policy is limited and has had only a marginal impact on firms' employment decisions.