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An Evaluation of Wage Subsidy Programs to SMEs Utilising Propensity Score Matching


  • Venetoklis, Takis


We evaluate direct wage subsidy programs to Finnish SMEs utilising as the unit of interest the firm and its characteristics. In estimating Average Treatment effects on the Treated firms (ATT) we apply recent techniques of propensity score matching algorithms developed by Becker and Ichino (2002) together with Difference in Differences (DiD) estimations. We define our outcome indicator as the net salary costs growth of the treated firms for up to two years after the first receipt of the wage subsidy. We find that, on average, the subsidised firms compared to the non-subsidised ones have higher payroll costs during the first year after the receipt of wage subsidies. Also, the first post-subsidies-year average net payroll growth comes out larger than the estimated average wages spent for the subsidised workers only. This may indicate that firms employ the subsidised workers for at least one year after the subsidised period and perhaps employ, in addition, extra staff. Although still positive, the net aggregate salary costs growth measured two years after the receipt of subsidies diminishes and seems not to cover all of the subsidised workers? salary costs. One could interpret these results as initial signs of lay-offs of the subsidised workers and/or of the extra staff employed the previous period. From a pure economic efficiency as well as a distributive justice point of view this two year employment spell for the previously unemployed could be considered as an adequate program effect. On the contrary, the diminishing salary costs growth already during the second year after the subsidies receipt might indicate non-sustainable positive wage subsidies effects even on a short term basis. Evaluation, employment, wage subsidies, estimation methods

Suggested Citation

  • Venetoklis, Takis, 2004. "An Evaluation of Wage Subsidy Programs to SMEs Utilising Propensity Score Matching," Research Reports 106, VATT Institute for Economic Research.
  • Handle: RePEc:fer:resrep:106

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    References listed on IDEAS

    1. Michael Lechner, 2002. "Program Heterogeneity And Propensity Score Matching: An Application To The Evaluation Of Active Labor Market Policies," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 205-220, May.
    2. James J. Heckman & Hidehiko Ichimura & Petra E. Todd, 1997. "Matching As An Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," Review of Economic Studies, Oxford University Press, vol. 64(4), pages 605-654.
    3. Aki Kangasharju, 2007. "Do Wage Subsidies Increase Employment in Subsidized Firms?," Economica, London School of Economics and Political Science, vol. 74(293), pages 51-67, February.
    4. Jochen Kluve & Hartmut Lehmann & Christoph M. Schmidt, 2000. "Disentangling Treatment Effects of Polish Active Labour Market Policies: Evidence from Matched Samples," CERT Discussion Papers 0007, Centre for Economic Reform and Transformation, Heriot Watt University.
    5. Petra E. Todd & Jeffrey A. Smith, 2001. "Reconciling Conflicting Evidence on the Performance of Propensity-Score Matching Methods," American Economic Review, American Economic Association, vol. 91(2), pages 112-118, May.
    6. Rajeev H. Dehejia & Sadek Wahba, 1998. "Causal Effects in Non-Experimental Studies: Re-Evaluating the Evaluation of Training Programs," NBER Working Papers 6586, National Bureau of Economic Research, Inc.
    7. Rajeev H. Dehejia & Sadek Wahba, 2002. "Propensity Score-Matching Methods For Nonexperimental Causal Studies," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 151-161, February.
    8. Czarnitzki, Dirk & Fier, Andreas, 2002. "Do Innovation Subsidies Crowd Out Private Investment? Evidence from the German Service Sector," ZEW Discussion Papers 02-04, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    9. Venetoklis, Takis & Kangasharju, Aki, 2002. "Business Subsidies and Employment of Firms: Overall Evaluation and Regional Extension," Discussion Papers 268, VATT Institute for Economic Research.
    10. James J. Heckman & Hidehiko Ichimura & Petra Todd, 1998. "Matching As An Econometric Evaluation Estimator," Review of Economic Studies, Oxford University Press, vol. 65(2), pages 261-294.
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