IDEAS home Printed from https://ideas.repec.org/p/rug/rugwps/23-1071.html
   My bibliography  Save this paper

Labour costs and the decision to hire the first employee

Author

Listed:
  • Bart Cockx
  • Sam Desiere

Abstract

Firms without paid employees account for up to 80% of all firms, but only a small minority ever hires. This paper investigates the relationship between labour costs and the decision to hire a first employee and become an employer. Leveraging a unique policy in Belgium that permanently reduced the labour cost of the first employee by 13%, we find that the number of new, first-time employers jumped by 31% immediately following the reform. The elasticity of the probability to hire the first employee with respect to the labour cost is -2.39 [95% CI: -3.45,-1.25].

Suggested Citation

  • Bart Cockx & Sam Desiere, 2023. "Labour costs and the decision to hire the first employee," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 23/1071, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:23/1071
    as

    Download full text from publisher

    File URL: http://wps-feb.ugent.be/Papers/wp_23_1071.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Luis Garicano & Claire Lelarge & John Van Reenen, 2016. "Firm Size Distortions and the Productivity Distribution: Evidence from France," American Economic Review, American Economic Association, vol. 106(11), pages 3439-3479, November.
    2. Alan I. Barreca & Jason M. Lindo & Glen R. Waddell, 2016. "Heaping-Induced Bias In Regression-Discontinuity Designs," Economic Inquiry, Western Economic Association International, vol. 54(1), pages 268-293, January.
    3. Emmanuel Saez & Benjamin Schoefer & David Seim, 2019. "Payroll Taxes, Firm Behavior, and Rent Sharing: Evidence from a Young Workers' Tax Cut in Sweden," American Economic Review, American Economic Association, vol. 109(5), pages 1717-1763, May.
    4. Nezih Guner & Gustavo Ventura & Xu Yi, 2008. "Macroeconomic Implications of Size-Dependent Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 721-744, October.
    5. Caliendo, Marco & Fossen, Frank M. & Kritikos, Alexander S., 2022. "Personality characteristics and the decision to hire," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 31(3), pages 736-761.
    6. Erik Hurst & Benjamin Wild Pugsley, 2011. "What Do Small Businesses Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 73-142.
    7. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1994. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 53-75, February.
    8. Harju, Jarkko & Matikka, Tuomas & Rauhanen, Timo, 2019. "Compliance costs vs. tax incentives: Why do entrepreneurs respond to size-based regulations?," Journal of Public Economics, Elsevier, vol. 173(C), pages 139-164.
    9. Robert W. Fairlie & Javier Miranda, 2017. "Taking the Leap: The Determinants of Entrepreneurs Hiring Their First Employee," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(1), pages 3-34, February.
    10. Sebastian Calonico & Matias D. Cattaneo & Rocio Titiunik, 2014. "Robust Nonparametric Confidence Intervals for Regression‐Discontinuity Designs," Econometrica, Econometric Society, vol. 82, pages 2295-2326, November.
    11. Catherine Hausman & David S. Rapson, 2018. "Regression Discontinuity in Time: Considerations for Empirical Applications," Annual Review of Resource Economics, Annual Reviews, vol. 10(1), pages 533-552, October.
    12. Gert Bijnens & Jozef Konings, 2020. "Declining business dynamism in Belgium," Small Business Economics, Springer, vol. 54(4), pages 1201-1239, April.
    13. Abhijit V. Banerjee & Esther Duflo, 2014. "Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(2), pages 572-607.
    14. Fairlie, Robert W, 1999. "The Absence of the African-American Owned Business: An Analysis of the Dynamics of Self-Employment," Journal of Labor Economics, University of Chicago Press, vol. 17(1), pages 80-108, January.
    15. Zoltan Acs & Thomas Åstebro & David Audretsch & David T. Robinson, 2016. "Public policy to promote entrepreneurship: a call to arms," Small Business Economics, Springer, vol. 47(1), pages 35-51, June.
    16. Gert Bijnens & Shyngys Karimov & Jozef Konings, 2023. "Does Automatic Wage Indexation Destroy Jobs? A Machine Learning Approach," De Economist, Springer, vol. 171(1), pages 85-117, March.
    17. Criscuolo, Chiara & Gal, Peter N. & Menon, Carlo, 2014. "The dynamics of employment growth: new evidence from 18 countries," LSE Research Online Documents on Economics 60286, London School of Economics and Political Science, LSE Library.
    18. repec:bla:obuest:v:62:y:2000:i:5:p:565-87 is not listed on IDEAS
    19. Raj Chetty, 2012. "Bounds on Elasticities With Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply," Econometrica, Econometric Society, vol. 80(3), pages 969-1018, May.
    20. Muehlemann, Samuel & Strupler Leiser, Mirjam, 2018. "Hiring costs and labor market tightness," Labour Economics, Elsevier, vol. 52(C), pages 122-131.
    21. Pedro Bento & Diego Restuccia, 2019. "The Role of Nonemployers in Business Dynamism and Aggregate Productivity," NBER Working Papers 25998, National Bureau of Economic Research, Inc.
    22. Mathilde Godard & Pierre Koning & Maarten Lindeboom, 2024. "Application and Award Responses to Stricter Screening in Disability Insurance," Journal of Human Resources, University of Wisconsin Press, vol. 59(5), pages 1353-1386.
    23. Emmanuel Saez & Manos Matsaganis & Panos Tsakloglou, 2012. "Earnings Determination and Taxes: Evidence From a Cohort-Based Payroll Tax Reform in Greece," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 493-533.
    24. Leo Kaas & Philipp Kircher, 2015. "Efficient Firm Dynamics in a Frictional Labor Market," American Economic Review, American Economic Association, vol. 105(10), pages 3030-3060, October.
    25. Huttunen, Kristiina & Pirttilä, Jukka & Uusitalo, Roope, 2013. "The employment effects of low-wage subsidies," Journal of Public Economics, Elsevier, vol. 97(C), pages 49-60.
    26. Raj Chetty & Adam Guren & Day Manoli & Andrea Weber, 2013. "Does Indivisible Labor Explain the Difference between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities," NBER Macroeconomics Annual, University of Chicago Press, vol. 27(1), pages 1-56.
    27. Sebastian Calonico & Matias D. Cattaneo & Max H. Farrell & Rocío Titiunik, 2019. "Regression Discontinuity Designs Using Covariates," The Review of Economics and Statistics, MIT Press, vol. 101(3), pages 442-451, July.
    28. Andrew E. Burke & Felix R. FitzRoy & Michael A. Nolan, 2000. "When Less is More: Distinguishing Between Entrepreneurial Choice and Performance," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(5), pages 565-587, December.
    29. Fatih Karahan & Benjamin Pugsley & Ayşegül Şahin, 2024. "Demographic Origins of the Start-up Deficit," American Economic Review, American Economic Association, vol. 114(7), pages 1986-2023, July.
    30. Ryan Decker & John Haltiwanger & Ron Jarmin & Javier Miranda, 2014. "The Role of Entrepreneurship in US Job Creation and Economic Dynamism," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 3-24, Summer.
    31. Aparna Mathur, 2010. "Health insurance and job creation by the self-employed," Small Business Economics, Springer, vol. 35(3), pages 299-317, October.
    32. Carroll, Robert & Holtz-Eakin, Douglas & Rider, Mark & Rosen, Harvey S, 2000. "Income Taxes and Entrepreneurs' Use of Labor," Journal of Labor Economics, University of Chicago Press, vol. 18(2), pages 324-351, April.
    33. Chiara Criscuolo & Ralf Martin & Henry G. Overman & John Van Reenen, 2019. "Some Causal Effects of an Industrial Policy," American Economic Review, American Economic Association, vol. 109(1), pages 48-85, January.
    34. Wei Cui & Mengying Wei & Weisi Xie & Jing Xing, 2021. "Corporate Tax Cuts for Small Firms: What Do Firms Do?," CESifo Working Paper Series 9389, CESifo.
    35. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
    36. Steven J. Davis & John Haltiwanger & Ronald S. Jarmin & C.J. Krizan & Javier Miranda & Alfred Nucci & Kristin Sandusky, 2009. "Measuring the Dynamics of Young and Small Businesses: Integrating the Employer and Nonemployer Universes," NBER Chapters, in: Producer Dynamics: New Evidence from Micro Data, pages 329-366, National Bureau of Economic Research, Inc.
    37. Andrea Albanese & Bart Cockx & Muriel Dejemeppe, 2022. "Long-Term Effects of Hiring Subsidies for Unemployed Youths—Beware of Spillovers," CESifo Working Paper Series 9972, CESifo.
    38. Youssef Benzarti & Jarkko Harju, 2021. "Using Payroll Tax Variation to Unpack the Black Box of Firm-Level Production," Journal of the European Economic Association, European Economic Association, vol. 19(5), pages 2737-2764.
    39. repec:hal:spmain:info:hdl:2441/2rcfhie1t29t8ri11cvv60qku0 is not listed on IDEAS
    40. Pierre Cahuc & Stéphane Carcillo & Thomas Le Barbanchon, 2019. "The Effectiveness of Hiring Credits," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(2), pages 593-626.
    41. Ondřej Dvouletý & Stjepan Srhoj & Smaranda Pantea, 2021. "Public SME grants and firm performance in European Union: A systematic review of empirical evidence," Small Business Economics, Springer, vol. 57(1), pages 243-263, June.
    42. Kersten, Renate & Harms, Job & Liket, Kellie & Maas, Karen, 2017. "Small Firms, large Impact? A systematic review of the SME Finance Literature," World Development, Elsevier, vol. 97(C), pages 330-348.
    43. Johan Hombert & Antoinette Schoar & David Sraer & David Thesmar, 2020. "Can Unemployment Insurance Spur Entrepreneurial Activity? Evidence from France," Journal of Finance, American Finance Association, vol. 75(3), pages 1247-1285, June.
    44. Albanese, Andrea & Cockx, Bart, 2019. "Permanent wage cost subsidies for older workers. An effective tool for employment retention and postponing early retirement?," Labour Economics, Elsevier, vol. 58(C), pages 145-166.
    45. Desiere Sam & Cockx Bart, 2022. "How effective are hiring subsidies in reducing long-term unemployment among prime-aged jobseekers? Evidence from Belgium," IZA Journal of Labor Policy, Sciendo & Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 12(1), pages 1-38, January.
    46. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
    47. David S. Lee & Thomas Lemieux, 2010. "Regression Discontinuity Designs in Economics," Journal of Economic Literature, American Economic Association, vol. 48(2), pages 281-355, June.
    48. Lichter, Andreas & Peichl, Andreas & Siegloch, Sebastian, 2015. "The own-wage elasticity of labor demand: A meta-regression analysis," European Economic Review, Elsevier, vol. 80(C), pages 94-119.
    49. Pierre Cahuc & Stéphane Carcillo & Thomas Le Barbanchon, 2019. "The Effectiveness of Hiring Credits," SciencePo Working papers Main hal-03391893, HAL.
    50. Ufuk Akcigit & Sina T. Ates, 2021. "Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(1), pages 257-298, January.
    51. Ryan A. Decker & John Haltiwanger & Ron S. Jarmin & Javier Miranda, 2016. "Declining Business Dynamism: What We Know and the Way Forward," American Economic Review, American Economic Association, vol. 106(5), pages 203-207, May.
    52. Suresh de Mel & David McKenzie & Christopher Woodruff, 2019. "Labor Drops: Experimental Evidence on the Return to Additional Labor in Microenterprises," American Economic Journal: Applied Economics, American Economic Association, vol. 11(1), pages 202-235, January.
    53. Burke, Andrew E & FitzRoy, Felix R & Nolan, Michael A, 2002. "Self-Employment Wealth and Job Creation: The Roles of Gender, Non-pecuniary Motivation and Entrepreneurial Ability," Small Business Economics, Springer, vol. 19(3), pages 255-270, November.
    54. Pierre Cahuc & Stéphane Carcillo & Thomas Le Barbanchon, 2019. "The Effectiveness of Hiring Credits," SciencePo Working papers hal-03391893, HAL.
    55. Alex Coad & Kristian Nielsen & Bram Timmermans, 2017. "My first employee: an empirical investigation," Small Business Economics, Springer, vol. 48(1), pages 25-45, January.
    56. Millán, Ana & Millán, José María & Román, Concepción & van Stel, André, 2013. "How does employment protection legislation influence hiring and firing decisions by the smallest firms?," Economics Letters, Elsevier, vol. 121(3), pages 444-448.
    57. Henrik J. Kleven & Mazhar Waseem, 2013. "Using Notches to Uncover Optimization Frictions and Structural Elasticities: Theory and Evidence from Pakistan," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(2), pages 669-723.
    58. John Haltiwanger & Ron S. Jarmin & Javier Miranda, 2013. "Who Creates Jobs? Small versus Large versus Young," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 347-361, May.
    59. Andrew Henley, 2005. "Job Creation by the Self-employed: The Roles of Entrepreneurial and Financial Capital," Small Business Economics, Springer, vol. 25(2), pages 175-196, September.
    60. Fatih Karahan & Ryan Michaels & Benjamin Pugsley & Ayşegül Şahin & Rachel Schuh, 2017. "Do Job-to-Job Transitions Drive Wage Fluctuations over the Business Cycle?," American Economic Review, American Economic Association, vol. 107(5), pages 353-357, May.
    61. Stefaan Decramer & Stijn Vanormelingen, 2016. "The effectiveness of investment subsidies: evidence from a regression discontinuity design," Small Business Economics, Springer, vol. 47(4), pages 1007-1032, December.
    62. repec:hal:wpaper:hal-03714169 is not listed on IDEAS
    63. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nivala, Annika, 2024. "(No) Effects of Subsidizing the First Employee: Evidence of a Low Take-up Puzzle Among Firms," Working Papers 166, VATT Institute for Economic Research.
    2. Annika Nivala, 2024. "(No) Effects of Subsidizing the First Employee: Evidence of a Low Take-up Puzzle Among Firms," Working Papers 23, Finnish Centre of Excellence in Tax Systems Research.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marco Caliendo & Frank M Fossen & Alexander S Kritikos, 2022. "Personality characteristics and the decision to hire [Do the unemployed become successful entrepreneurs?]," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 31(3), pages 736-761.
    2. Geurts, Karen & Van Biesebroeck, Johannes, 2016. "Firm creation and post-entry dynamics of de novo entrants," International Journal of Industrial Organization, Elsevier, vol. 49(C), pages 59-104.
    3. Albanese, Andrea & Cockx, Bart & Dejemeppe, Muriel, 2024. "Long-term effects of hiring subsidies for low-educated unemployed youths," Journal of Public Economics, Elsevier, vol. 235(C).
    4. Enrico Rubolino, 2022. "Taxing the Gender Gap: Labor Market Effects of a Payroll Tax Cut for Women in Italy," Cahiers de Recherches Economiques du Département d'économie 22.01, Université de Lausanne, Faculté des HEC, Département d’économie.
    5. Robert W. Fairlie & Javier Miranda, 2017. "Taking the Leap: The Determinants of Entrepreneurs Hiring Their First Employee," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(1), pages 3-34, February.
    6. Babina, Tania & Ma, Wenting & Moser, Christian & Ouimet, Paige & Zarutskie, Rebecca, 2019. "Pay, Employment, and Dynamics of Young Firms," MPRA Paper 95382, University Library of Munich, Germany.
    7. Daan Freeman & Leon Bettendorf & Harro van Heuvelen & Gerdien Meijerink, 2021. "The contribution of business dynamics to productivity growth in the Netherlands," CPB Discussion Paper 427, CPB Netherlands Bureau for Economic Policy Analysis.
    8. Vladasel, Theodor & Lindquist, Matthew J. & Sol, Joeri & van Praag, Mirjam, 2021. "On the origins of entrepreneurship: Evidence from sibling correlations," Journal of Business Venturing, Elsevier, vol. 36(5).
    9. Alex Coad & Kristian Nielsen & Bram Timmermans, 2017. "My first employee: an empirical investigation," Small Business Economics, Springer, vol. 48(1), pages 25-45, January.
    10. Kim, Jinyoung & Kim, Seonghoon & Koh, Kanghyock, 2022. "Labor market institutions and the incidence of payroll taxation," Journal of Public Economics, Elsevier, vol. 209(C).
    11. Nivala, Annika, 2024. "(No) Effects of Subsidizing the First Employee: Evidence of a Low Take-up Puzzle Among Firms," Working Papers 166, VATT Institute for Economic Research.
    12. Youssef Benzarti & Jarkko Harju, 2021. "Using Payroll Tax Variation to Unpack the Black Box of Firm-Level Production," Journal of the European Economic Association, European Economic Association, vol. 19(5), pages 2737-2764.
    13. Michael Anyadike-Danes & Carl-Magnus Bjuggren & Sandra Gottschalk & Werner Hölzl & Dan Johansson & Mika Maliranta & Anja Myrann, 2015. "An international cohort comparison of size effects on job growth," Small Business Economics, Springer, vol. 44(4), pages 821-844, April.
    14. Pierre Azoulay & Benjamin F. Jones & J. Daniel Kim & Javier Miranda, 2020. "Age and High-Growth Entrepreneurship," American Economic Review: Insights, American Economic Association, vol. 2(1), pages 65-82, March.
    15. Drautzburg, Thorsten, 2019. "Entrepreneurial tail risk: Implications for employment dynamics," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 85-100.
    16. Benjamin Wild Pugsley & Ay’egul ahin, 2019. "Grown-up Business Cycles," The Review of Financial Studies, Society for Financial Studies, vol. 32(3), pages 1102-1147.
    17. J. David Brown & John S. Earle & Mee Jung Kim & Kyung Min Lee, 2017. "High-Growth Entrepreneurship," Working Papers 17-53, Center for Economic Studies, U.S. Census Bureau.
    18. Andrea Albanese & Bart Cockx & Muriel Dejemeppe, 2022. "Long-Term Effects of Hiring Subsidies for Unemployed Youths—Beware of Spillovers," CESifo Working Paper Series 9972, CESifo.
    19. Åstebro, Thomas & Tåg, Joacim, 2017. "Gross, net, and new job creation by entrepreneurs," Journal of Business Venturing Insights, Elsevier, vol. 8(C), pages 64-70.
    20. Richard Fabling, 2018. "Entrepreneurial beginnings: Transitions to self-employment and the creation of jobs," Working Papers 18_12, Motu Economic and Public Policy Research.

    More about this item

    Keywords

    nonemployers; hiring decisions; payroll taxes; small businesses;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rug:rugwps:23/1071. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Nathalie Verhaeghe (email available below). General contact details of provider: https://edirc.repec.org/data/ferugbe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.