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Permanent exemption from payroll taxes: The role of hiring frictions

Author

Listed:
  • Gert Bijnens

    (National Bank of Belgium, Research Department)

  • Sam Desiere

    (Ghent University, Belgium)

  • Rigas Oikonomou

    (IRES/LIDAM, UCLouvain, Belgium)

  • Tiziano Toniolo

    (IRES/LIDAM, Uclouvain, Belgium)

  • Bruno Van der Linden

    (IRES/LIDAM, UCLouvain, Belgium and IZA, CESifo, Germany)

Abstract

Belgium’s 2016 payroll tax exemption for first-time employers triggered a sharp increase in firms hiring their first worker but little growth among larger firms. To account for this pattern, we develop and estimate a directed search model—with discrete hiring, firm heterogeneity, and endogenous entry— using Belgian microdata. The exemption reduces the high marginal cost of the first hire, enabling many previously non-hiring entrepreneurs to become employers, but most lack the productivity needed to expand beyond one worker. The model matches the post-reform size distribution and identifies the conditions under which size-dependent hiring subsidies can foster sustained firm growth.

Suggested Citation

  • Gert Bijnens & Sam Desiere & Rigas Oikonomou & Tiziano Toniolo & Bruno Van der Linden, 2026. "Permanent exemption from payroll taxes: The role of hiring frictions," Working Paper Research 487, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:202601-487
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    File URL: https://www.nbb.be/fr/publications-research/publications/publications/permanent-exemption-payroll-taxes-role-hiring
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    Keywords

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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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