Are payroll tax cuts absorbed by insiders? Evidence from the Swedish retail industry

Payroll tax cuts are considered inefficient for increasing employment among outsiders because insiders will use their power to bargain for higher wages at the expense of outsiders’ possibility of becoming employed. The extent to which insiders or outsiders reap the rewards of payroll tax cuts is a matter of debate, and previous literature has largely focused on the employment effects of outsiders. Using wage statistics of employees in the Swedish retail sector, we investigate the effects of a youth payroll tax cut in 2007 on insiders’ wage earnings and the number of hours worked. In line with earlier studies, the results show that the payroll tax cut increased insiders’ total wage earnings. However, only 21% of the increase in wage earnings resulted from higher bargained wages. 57% of the wage increase corresponds to a higher intensive margin of employment, and the rest was attributed to the number of hours worked by insiders with a higher hourly wage rate. Thus, there is little to suggest that insiders can absorb large amounts of payroll tax cuts in the form of higher bargained wages, even when a small number of workers hold the most bargaining power.