When Tax Credits Help Employment Recovery
Hiring credits have been used in the United States and in a number of European countries to counteract the employment effects of the 2008-2009 recession. Despite their wide use, many economists think that hiring credits are probably useless during recessions, when aggregate demand is insufficient relative to labor and other available resources in the economy. In fact, there is very little empirical evidence about the effects of hiring credits.
In a paper with Cahuc and Carcillo, we seize the opportunity of the natural experiment constituted by the 2009 French hiring credit to highlight the effectiveness of such policies. This employment tax credit, announced on 4 December 2008, relieved firms from social contributions on new hires until 31 December 2009. The relief was maximal for workers paid at the minimum hourly wage (12% reduction in labor cost). The relief then decreased as the hourly wage level rose up to 1.6 times the minimum wage.
The hiring credit was arbitrarily restricted, for budgetary reasons, to firms with fewer than 10 employees, and to low-wage workers. Firms had to request the tax relief for each hire separately. The hiring credit was not restricted to firms with net employment growth, and it was not limited to the hiring of specific disadvantaged groups. We show that these restrictions and other features of the program ensure that its implementation can be considered as a natural experiment.
Our evaluation uses administrative data, which provide detailed information about all firms and hiring subsidies, and compares the evolution of small firms (between 6 and 10 employees) and medium-size firms (between 10 and 14 employees) from November 2008, just before the program's inception, until November 2009.
We find that the French hiring credit significantly increased by 0.8% the growth rate of targeted firms. We find that firms did not substitute hours of new workers benefiting from the hiring credit for those of incumbent employees. There is no increase in wages associated with the hiring credit, and firms did not increase layoffs in order to hire workers at a lower cost. We do not detect any negative impact of the hiring credit on non-targeted firms. Finally, we do not find evidence of inter-temporal substitution effects, which would have implied slower employment growth of small firms after the credit ended.
It is possible that the effectiveness of the French hiring credit relied on particular circumstances. In particular, it was one-off, unanticipated, and temporary, it was targeted at a small subset of firmsm and it was implemented in a context of highly binding wage floors and high unemployment. To explore this issue, we use quasi-experimental variations induced by the program to estimate the cost per job created if the hiring credit had been implemented in a different economic environment, on a different scale, and on different time span. Among the elements that have favored the effectiveness of the hiring credit, it appears that its temporary nature was key. The one-off, unexpected, temporary nature of the hiring credit allowed the government to lower the cost of new entrants but not that of incumbent workers, with limited effects on wages which need time to adjust.