An Evaluation of Wage Subsidy Programs to SMEs Utilising Propensity Score Matching

We evaluate direct wage subsidy programs to Finnish SMEs utilising as the unit of interest the firm and its characteristics. In estimating Average Treatment effects on the Treated firms (ATT) we apply recent techniques of propensity score matching algorithms developed by Becker and Ichino (2002) together with Difference in Differences (DiD) estimations. We define our outcome indicator as the net salary costs growth of the treated firms for up to two years after the first receipt of the wage subsidy. We find that, on average, the subsidised firms compared to the non-subsidised ones have higher payroll costs during the first year after the receipt of wage subsidies. Also, the first post-subsidies-year average net payroll growth comes out larger than the estimated average wages spent for the subsidised workers only. This may indicate that firms employ the subsidised workers for at least one year after the subsidised period and perhaps employ, in addition, extra staff. Although still positive, the net aggregate salary costs growth measured two years after the receipt of subsidies diminishes and seems not to cover all of the subsidised workers? salary costs. One could interpret these results as initial signs of lay-offs of the subsidised workers and/or of the extra staff employed the previous period. From a pure economic efficiency as well as a distributive justice point of view this two year employment spell for the previously unemployed could be considered as an adequate program effect. On the contrary, the diminishing salary costs growth already during the second year after the subsidies receipt might indicate non-sustainable positive wage subsidies effects even on a short term basis. Evaluation, employment, wage subsidies, estimation methods