The paper makes a number of contributions to the literature. First, although the literature on wage subsidies has been growing in recent years, there remain relatively few studies that rigorously measure the impact of wage subsidies, particularly of those that cover the costs of social security contributions by employers. One reason for the scarcity of evidence is that wage subsidies, in the form of targeted cuts to employers’ social security contributions, have not been implemented in practice in many countries. Despite the large agreement in the theoretical literature that these subsidies should be effective, there is relatively little empirical research that has examined the effectiveness of the (employer-side) wage subsidies. This is in marked contrast to a large literature that has examined the effects of the targeted tax cuts for employees. Such evidence is even more sparse in the context of developing economies that face a high level of informal employment compared to high-income countries.

Second, our paper uses granular firm-level data from social security administrative records to estimate the effectiveness of an employment subsidy scheme that reduced the costs of social security contributions borne by the employer. It is thus one of the few studies that use such detailed information to study this question as opposed to more aggregate data from nationally representative surveys. Prior studies on employment subsidies for Turkey, such as Betcherman et al. (2010) or Balkan et al. (2016) use data aggregated at a large geographical level, or worker-level information from surveys to evaluate employment effects. In contrast, we are able to take advantage of granular administrative data, where registered employment is reported with monthly frequency over the past 15 years at the firm level. This allows to closely look at firm-level employment dynamics over time before and after the subsidy implementation.

Another important way in which the paper differs from the previous literature is that it studies the effect of a social security contribution subsidy on small firms.<sup>6</sup> This distinction is important in several respects. First, small firms tend to be less productive and typically face a lower probability of detection of informal employment due to their smaller size. As a result, they are more likely to resort to informal employment to hire workers, as opposed to larger firms where most workers are employed formally. Hence, the effectiveness of employment subsidy schemes aimed at increasing employment and reducing informality is likely to differ by firm size. Second, small firms – with fewer than 10 employees – still constitute the large majority of firms in low and middle-income countries, as in Turkey, and represent a substantial share of total employment.

Turkey is a relevant country case to study for several reasons. First, Turkey has a relatively higher firm tax wedge compared to the OECD average, with on average about 39 percent of the total cost of labor to the employer paid to the government in the form of taxes or social

> 6 The employment subsidy studied by Betcherman et al. (2010) in the Turkish context was targeted to firms larger than 10 employees.

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