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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Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

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: 64 pages
Date: 2026-02
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:26/1133

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