The Effects of Financial Incentives on Small and Medium-sized Enterprises' Demand for Workers with Disabilities: Evidence from changes in Japan's employment quota system

This study evaluates whether a levy–grant system for disability employment promotes employment in small and medium-sized enterprises using administrative data recording the firms’ employment of people with disabilities by law. We employ a 2015 policy change in Japan regarding the size of firms subject to the levy–grant system as a natural experiment and use the difference-in-differences method to examine the effect of the change. The results reveal several important findings. First, the policy change generally promotes the employment of people with disabilities in small and medium-sized enterprises in Japan. Second, we observe that firms originally employing workers with disabilities increase their number, while firms that did not originally employ any workers with disabilities start to hire them. Third, the treatment effects appear even before the policy implementation, indicating that prior announcements encouraged firms to secure people with disabilities with the appropriate skills for their firms at an early period. Fourth, a levy imposed for not achieving the legal employment rate is more effective than a grant paid for achieving the rate. Finally, we confirm the heterogeneity in policy effects by region and industry.