Permanent exemption from payroll taxes: The role of hiring frictions

Sam Desiere, Rigas Oikonomou, Tiziano Toniolo, Bruno Van der Linden and Gert Bijnens
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Sam Desiere: Ghent University, Belgium
Rigas Oikonomou: UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)
Tiziano Toniolo: IZA, Germany
Bruno Van der Linden: UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)
Gert Bijnens: National Bank of Belgium

No 2026003, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

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)
Date: 2025-12
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2026003

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