I then use individual level employment data from the Mexican Labor Market Survey (ENOE) to gauge whether the measured effect reflects movements in and out of social security registration instead of reflecting actual increases in employment and do not find this to be the case. ENOE data also show no evidence of displacement effects on employment in ineligible durable goods manufacturing industries.

The measured impact of wage subsidies on firms’ employment levels are larger than other estimates in the literature. Kangasharju (2007) show that wage subsidies for hiring unemployed workers in Finland raised employment in eligible firms by 9% and Betcherman, Daysal, and Pagés (2010) find that employment subsidies to firms that created new jobs in Turkey led to an increase in registered jobs in eligible provinces by up to 15%. In fact, the finding that the effect of wage subsidies was greater after the subsidy period than before is unique in the literature. Most papers measure the effect of wage subsidies during the period when the subsidies are being paid. Two exceptions are Card and Hyslop (2005) for Canada and Groh et al. (2015) for Jordan. Both of these papers find positive short‐term impacts on employment, but that these effects dissipate after the subsidy ended.

The findings thus suggest that the use of wage subsidies may be particularly effective during an economic crisis since they can be paid for a relatively short amount of time and still have lasting effects on employment. At the same time, the results raise a question about the channel through which the wage subsidies worked. The intention of the program was to allow firms to keep workers with job‐ specific skills, but the estimated effect on employment, while positive, is not statistically significant during the program’s duration. Larger, statistically significant effects, only emerge after the program ended. One possible explanation is that the program affected which types of workers subsidized firms kept vs. let go. That is, subsidized firms may have kept the workers with the most specialized and relevant skills in greater proportion than firms in ineligible industries. However, data from the ENOE do not support this argument. Instead, the data suggest that the employees who were laid off during the crisis were predominantly those with the lowest job tenure, who presumably have the lowest levels of job specific skills, both in eligible and ineligible industries.

Another potential explanation is that it was not the firing restrictions that allowed employment to recover faster after the crisis, but rather the subsidy funds. These funds may have provided liquidity for hiring back workers, thereby allowing firms to take advantage of market opportunities at a time when other funding sources were scarce. In fact, firms typically received the subsidy many months after they limited layoffs, and the time when funds started to be paid out corresponds to the time when employment in eligible industries started to increase again after its initial drop during the crisis.

The remainder of this paper is structured as follows: Section 2 describes the wage subsidy program; Section 3 the data and identification strategy; Section 4 the results and robustness checks; and Section 5 concludes.

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