Hiring credits1 have been used in the US and in a number of European countries to counteract the employment effects of the Global Crisis (see OECD 2010 for a detailed presentation of hiring credit measures in 2009). Despite this wide use, many economists think that hiring credits are probably useless during recessions, when aggregate demand is insufficient relative to labour and other resources available in the economy. In fact, there is very little empirical evidence about the effects of hiring credits. Evidence on federal programmes in the US is from the 80s (Perloff and Wachter 1979, Bishop 1981), and the only recent evidence concerns hiring credits implemented at the US state level (Neumark and Grijalva 2017).
In a recent paper, we seize the opportunity of the natural experiment induced by the 2009 French hiring credit programme to highlight the effectiveness of such policies (Cahuc et al. 2017). This hiring credit, announced on 4 December 2008, relieved firms from social contributions on new hires until 31 December 2009. The relief was maximal for workers with an hourly remuneration at the minimum wage level, and was then decreased as the hourly wage level rose up to 1.6 times the minimum wage. Figure 1 shows that the hiring credit reduced the labour cost by 12% for a full-time worker paid at the minimum wage. When the wage was 30% above the minimum wage, the subsidy rate represented only 4% of the labour cost.
Figure 1 The hiring credit schedule
Note: The horizontal axis reports the monthly wage (in euros) net of employer social contributions of a full time worker (in 2009, the monthly minimum wage was 1,338 euros in gross terms, i.e. including employee social contributions). The vertical axis reports the monthly labour cost. The continuous line displays the labour cost without the hiring credit. The dotted line shows the labour cost with the hiring credit.
The hiring credit was arbitrarily restricted, for budgetary reasons, to firms with fewer than 10 employees, and to low-wage workers. Firms had to request the relief for each hire separately, filling out a one-page form and attaching the labour contract. The claim had to be sent to the French Public Employment Service, which reimbursed the social contributions payments on eligible hires at the end of each quarter. To be sponsored, hires had to be on contracts lasting at least one month. The hiring credit was not restricted to firms with net employment growth, and it was not limited to the hiring of the long-term unemployed or any other disadvantaged groups (although eligible hires could not be otherwise sponsored by other targeted special measures, such as even more generous and pre-existing subsidies for apprentices or some disadvantaged groups like the long-term unemployed). We show that these restrictions and other features of the programme ensure that its implementation can be considered as a natural experiment.
Our evaluation of the French hiring credit uses administrative data, which provide detailed information about all firms and hiring subsidies. Our evaluation relies on two identification strategies. The difference-in-differences strategy compares the evolution of small firms (between 6 and 10 employees) and medium-size firms (between 10 and 14 employees) from November 2008, just before the programme's inception, to November 2009. The other strategy compares employment pool × sector cells with high and low shares of subsidised hires. Both strategies yield converging results.
We find that the French hiring credit increased by 0.8% the growth rate of targeted firms. Moreover, the employment effects are concentrated as expected on eligible jobs, i.e. low-wage jobs. As shown in Figure 2, the impact of the hiring credit emerged quickly. Before the implementation of the hiring credit, the employment growth of small firms (from 6 to 9.99 employees) and medium-sized firms (from 10 to 14 employees) had parallel trends. Just after the hiring credit was introduced, in December 2008, employment started to grow faster in small firms and this continued during all of 2009. We find that the evolution of hours worked is similar to that of employment, meaning that firms did not substitute hours of new workers benefiting from the hiring credit for those of incumbent employees. There is no increase in wages associated with the hiring credit, and firms did not increase layoffs in order to hire workers at lower cost. We do not detect any negative impact of the hiring credit on non-targeted firms. Finally, we do not find evidence of inter-temporal substitution effects, which would have implied slower employment growth in small firms after the credit ended.
Figure 2 Difference-in-differences estimates on the employment growth rate at the monthly frequency
Note: Each point plots the monthly difference-in-differences estimate of employment growth rates between small and medium sized firms. The employment growth rate of month m of year t is the average employment growth from November of year t-1 to the end of month m in year t, for both small and medium-sized firms according to their size in year t-1.
These results imply that the hiring credit has been very effective. The gross cost per job created is around one fourth of the average annual wage. To compute the cost per job created net of savings on social benefits, we exploit a survey that provides information about the characteristics of the beneficiaries of the hiring credit. It turns out that the net cost per job created is about zero.
It is possible that the effectiveness of this hiring credit relies on particular circumstances. In particular, it was temporary (as well as one-off and unanticipated), it was targeted at a small subset of firms, and it was implemented in a context with high binding wage floors and high unemployment. To explore this issue, we use quasi-experimental variations induced by the programme to estimate key structural parameters of a search and matching model, in order to simulate the cost per job created if the hiring credit were implemented in different economic environments, at different scales, and on different time spans.
Among all the elements that have favoured the effectiveness of the hiring credit, it appears that its temporary nature was key. The one-off, unanticipated and temporary nature of the hiring credit allowed the government to lower the cost of entrants but not that of incumbent workers, with limited effects on wages that need time to adjust. This implies that hiring credits can be effective in boosting job creation at a low cost if they are unanticipated and implemented for short periods of time. Simulations of the search and matching model suggest that this conclusion also holds true for economy-wide hiring credits, and even when the minimum wage is not binding. Nevertheless, a counterpart of this positive conclusion is that hiring credits create jobs at very high costs when they are permanent, either time-invariant or countercyclical, especially when there are no high wage floors. This suggests that they should be avoided in such circumstances.
Bishop, J H (1981), “Employment in construction and distribution industries: The impact of the New Jobs Tax Credit”, In S Rosen (ed.), Studies in Labor Markets, Chicago: University of Chicago Press, pp. 209-46.
Cahuc, P, S Carcillo, and T Le Barbanchon (2017), “The effectiveness of Hiring Credits”, CEPR Discussion Paper no. 12537, forthcoming in Review of Economic Studies.
OECD (2010), Employment Outlook, OECD publishing, Paris.
Neumark, D, and d Grijalva (2017), “The Employment Effects of State Hiring Credits”, Industrial and Labor Relations Review 70(5): 1111-1145.
Perlof, J M, and M L Wachter (1979), “The New Jobs Tax Credit: An Evaluation of the 1977-78 Wage Subsidy Program”, American Economic Review 69(2): 173-179.
 By definition hiring credits provide subsidies to new jobs for a limited period of time at the beginning of the job spell. Temporary hiring credits are one-off schemes that provide these subsidies during specific periods, whereas permanent hiring credits provide them permanently. Permanent hiring credits can be either time-invariant or countercyclical, i.e. provided in slowdowns only. Neumark and Grijalva (2017) report that 99 of the 147 hiring credits recorded in the United States over the period 1970-2012 are permanent.