security contributions (OECD, 2019)<sup>7</sup> . Second, despite substantial progress in recent years to reduce informality, employing workers “off the books” without paying any social security contribution remains common, particularly among small firms.<sup>8</sup> This is the case not only in Turkey, but also in the vast majority of developing economies. The effects of employment subsidies on employment in a context where registered employment is common may thus differ from a high-income context where there is hardly any informality. In addition to job creation, an increase in registered employment may thus also result from a formalization of already employed workers enabled by the subsidy.

The paper proceeds as follows. Section 2 discusses related literature. Section 3 provides some institutional background on employer social contributions in Turkey, and on the additional 6- point subsidy studied in this paper. Section 4 describes our administrative dataset. Section 5 presents our methodology and identification strategy. Section 6 reports and discusses our main results. Section 7 presents the results of the cost-benefit analysis of the subsidy, Section 8 concludes.

# **2. Related literature**

Employment subsidies aim to reduce the cost of labor to employers. They can be applied to all employees or only to new hires (marginal subsidies). They can also be general, in the sense of applying to all workers and establishments, or specific groups, if only certain types of workers (for example, low-wage, youth, long-term unemployed, women, or disabled workers) or certain sectors or geographic locations qualify. While wage subsidies can be directed to either employees or employers, in line with the policy analyzed in our study this literature overview focuses on hiring subsidies going to employers.

Prior evidence on the employment effects of employment subsidies primarily comes from high-income countries where labor markets are characterized by very little informal employment. In addition, most studies for high-income countries examine the effect of programs targeted to the unemployed or disadvantaged workers and in many cases, estimates of effects are based on surveys to employers. One of the best-known programs is the one implemented in France in the 1990s, which reduced the employer portion of the payroll tax for the low-wage workers. The impact of the French program was estimated by several papers including Kramarz and Philippon (2001) and Crepon and Desplatz (2003). Kramarz and Philippon (2001) base their evaluation on household survey data and examine the effects of changes in the minimum labor costs - hence capturing the effects of both the changes in the minimum wage and the changes in payroll tax subsidies at the minimum wage level. Their analysis regarding the effects of a decrease in labor costs due to an increase in the payroll tax

> 7 In 2020, Turkey had the 15th highest tax wedge among the 37 OECD member countries, occupying the same position in 2019 (calculated for a single worker). 8 As of 2018, about one third of workers in non-agriculture in Turkey were informally employed according to the Turkish Household Labor Force Survey (HLFS).

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