Where the Jobs Came From: Firm Growth, Entry, and Formalization

The PBM reform raised formal employment at the sector level, but that headline does not identify the firms or workers behind the increase. This chapter follows the response through existing-firm growth, observed entry, tax-regime switching, formalization, and possible spillovers. The goal is to distinguish an expansion of economic activity from a change in administrative status—and to show why the channel matters before local labor-market concentration can explain why some places responded more strongly than others.

The employment increase moves through firms

The first channel is expansion by firms already present in the standard-regime sample. After the payroll-tax change, the average number of employees per existing firm rises by approximately 3 percent. The second is net entry: the number of firms observed in the relevant population increases by about 2 percent. Combining these estimates, the paper attributes roughly 60 percent of the sectoral employment response to growth of existing firms and about 40 percent to firm entry.

This decomposition gives the five-percent sector result a more concrete shape. The policy did not operate only by persuading a large pool of new firms to appear, nor only by making incumbent firms larger. A lower labor cost can improve the return to expanding a current operation, while also making it more attractive for a business to enter or become formal enough to appear in the administrative population. Those are different transitions, but both can raise the number of formal workers recorded in a sector.

The figures should not be read as a universal law of firm behavior. They are estimates for this reform, sample, and period, and the paper cannot fully distinguish a genuinely new firm from a business that was already operating informally or under another tax regime. The 60/40 summary is therefore best used as a map of the measured response, not as a claim that every payroll-tax cut divides its jobs in those proportions.

Tax-regime switching makes that boundary visible. Firms in SIMPLES were not directly eligible for the PBM relief, but Brazilian law allowed firms to change tax regimes at the beginning of a year. If a SIMPLES firm moved into the standard regime after PBM implementation, it could become part of the directly treated administrative population even if its underlying business and workforce had existed before the switch.

The paper tests for this movement. In sectors receiving the PBM, the share of firms leaving SIMPLES for the standard regime rises by about 0.7–0.9 percentage points. That is roughly 8–10 percent of the average exit rate before the reform. The average size of SIMPLES firms also becomes 5.4–5.7 percent larger in treated sectors relative to the comparison after implementation. The pattern is consistent with firms responding to the incentive: businesses with more employees may have more to gain from replacing the old payroll charge with the new revenue-based contribution.

This behavior has two interpretations that point in opposite directions.