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Do Employment Subsidies Work? Evidence from Regionally Targeted Subsidies in Turkey

Author

Listed:
  • Betcherman, Gordon

    () (University of Ottawa)

  • Daysal, N. Meltem

    () (University of Southern Denmark)

  • Pagés, Carmen

    () (Inter-American Development Bank)

Abstract

This paper studies the effects on registered employment, earnings, and number of registered establishments of two employment subsidy schemes in Turkey. We implement a difference-in-differences methodology to construct appropriate counterfactuals for the covered provinces. Our findings suggest that both subsidy programs did lead to significant net increases in registered jobs in eligible provinces (5%-13% for the first program and 11%-15% for the second). However, the cost of the actual job creation was high because of substantial deadweight losses, particularly for the first program (47% and 78%). Because of better design features, the second subsidy program had lower, though still significant, deadweight losses (23%-44%). Although constrained by data availability, the evidence suggests that the dominant effect of subsidies was to increase social security registration of firms and workers rather than boosting total employment and economic activity. This supports the hypothesis that in countries with weak enforcement institutions, high labor taxes on low-wage workers may lead to substantial incentives for firms and workers to operate informally.

Suggested Citation

  • Betcherman, Gordon & Daysal, N. Meltem & Pagés, Carmen, 2008. "Do Employment Subsidies Work? Evidence from Regionally Targeted Subsidies in Turkey," IZA Discussion Papers 3508, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp3508
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    References listed on IDEAS

    as
    1. Gerfin, Michael & Lechner, Michael & Steiger, Heidi, 2005. "Does subsidised temporary employment get the unemployed back to work? Aneconometric analysis of two different schemes," Labour Economics, Elsevier, vol. 12(6), pages 807-835, December.
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    More about this item

    Keywords

    social security contribution; employment subsidies; deadweight loss; formalization;

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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