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

Abstract

This paper studies the e ects on registered employment, earnings, and number of registered establishments of two employment subsidy schemes in Turkey. We implement a di erence-in-di erences methodology to construct appropriate counterfactuals for the covered provinces. Our ndings suggest that both subsidy programs did lead to signi cant net increases in registered jobs in eligible provinces (5%{13% for the rst 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 rst program (47% and 78%). Because of better design features, the second subsidy program had lower, though still signi cant, deadweight losses (23%{44%). Although constrained by data availability, the evidence suggests that the dominant e ect of subsidies was to increase social security registration of rms 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 rms and workers to operate informally.