Can Wage Subsidies Boost Employment in the Wake of an Economic Crisis? Evidence from Mexico

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I EIZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. The rise in unemployment during an economic crisis poses a significant concern to policy makers. This paper measures the effect of a program in Mexico that granted firms in certain industries wage subsidies if they decided to keep their workers instead of letting them go during the recent economic crisis. The analysis uses monthly administrative data on employment at the industry level, along with propensity score matching to construct groups of eligible and ineligible durable goods manufacturing industries that display statistically identical pre-program trends in employment. Difference-in-difference results show a positive but not statistically significant effect of the wage subsidies on employment during the program's eight-month duration, ranging from 5.7 to 13.2 percent in magnitude, depending on the specification. The size of the effect increases to 24 percent after the program ended and the results indicate that employment after the program recovered faster in eligible industries than in ineligible industries.JEL Classification: J23, H32, L60

Policies to Support Businesses through the COVID-19 Shock: A Firm-Level Perspective

“…Additionally, this paper contributes to the emerging literature by authors including Chetty et al (2020), Granja et al (2020), and Cui et al (2020) that have provided some early evidence on the effectiveness of programs to help firms weather the impacts of the pandemic in the same countries, as well as previous studies such as De Mel et al (2012) and Bruhn (2020) that focused on experimental and quasi-experimental evidence from previous crises in Sri Lanka and Mexico. The rest of the paper is structured as follows. The next section presents the data.…”

“…In the aftermath of the December 2004 tsunami, Sri Lankan firms that received grants recovered profit levels substantially faster than those that did not (De Mel et al, 2012). Similarly, in Mexico, firms that were offered wage subsidies conditional on retaining workers in the aftermath of the global financial crisis, outperformed those that did not receive such benefits (Bruhn, 2020).…”

Policies to Support Businesses through the COVID-19 Shock: A Firm Level Perspective

“…In the aftermath of the December 2004 tsunami, Sri Lankan firms that received grants recovered profit levels substantially faster than those that did not ( De Mel, Mckenzie, and Woodruff 2012 ). Similarly, in Mexico, firms that were offered wage subsidies conditional on retaining workers in the aftermath of the global financial crisis outperformed those that did not receive such benefits ( Bruhn 2020 ).…”

“…(2020) , Granja et al. (2020) , che, and Cui, Hicks, and Norton (2020) that have provided some early evidence on the effectiveness of programs to help firms weather the impacts of the pandemic in the same countries, as well as previous studies such as De Mel, Mckenzie, and Woodruff (2012) and Bruhn (2020) that focused on experimental and quasi-experimental evidence from previous crises in Sri Lanka and Mexico.…”

Unmasking the Impact of COVID-19 on Businesses : Firm Level Evidence from across the World

“…Evidence from past crises suggests that temporary support to firms can be effective. Mexican wage subsidies after the global financial crisis helped speed up employment recovery, especially for smaller firms (Bruhn, 2020). In Sri Lanka, cash grants helped micro-firms survive the crisis and accelerated their recovery following the 2004 Tsunami (De Mel et al, 2012).…”