Permanent exemption from payroll taxes: The role of hiring frictions

Gert Bijnens (), Sam Desiere (), Rigas Oikonomou (), Tiziano Toniolo () and Bruno Van der Linden ()
Additional contact information
Gert Bijnens: National Bank of Belgium, Research Department
Sam Desiere: Ghent University, Belgium
Rigas Oikonomou: IRES/LIDAM, UCLouvain, Belgium
Tiziano Toniolo: IRES/LIDAM, Uclouvain, Belgium
Bruno Van der Linden: IRES/LIDAM, UCLouvain, Belgium and IZA, CESifo, Germany

No 487, Working Paper Research from National Bank of Belgium

Abstract: Belgium’s 2016 payroll tax exemption for first-time employers triggered a sharp increase in firms hiring their first worker but little growth among larger firms. To account for this pattern, we develop and estimate a directed search model—with discrete hiring, firm heterogeneity, and endogenous entry— using Belgian microdata. The exemption reduces the high marginal cost of the first hire, enabling many previously non-hiring entrepreneurs to become employers, but most lack the productivity needed to expand beyond one worker. The model matches the post-reform size distribution and identifies the conditions under which size-dependent hiring subsidies can foster sustained firm growth.

Keywords: payroll taxes; size-dependent policies; hiring frictions; wage subsidies; competitive search theory. (search for similar items in EconPapers)
JEL-codes: H25 J08 J23 J38 L25 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2026-01
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:202601-487

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