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Do regional payroll tax reductions boost employment?

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  • Bennmarker, Helge

    ()
    (IFAU - Institute for Labour Market Policy Evaluation)

  • Mellander, Erik

    ()
    (IFAU - Institute for Labour Market Policy Evaluation)

  • Öckert, Björn

    ()
    (IFAU - Institute for Labour Market Policy Evaluation)

Abstract

Using a Difference-in-Differences approach we evaluate the effects of a 10 percentage points reduction in the payroll tax introduced in 2002 for firms in the northern part of Sweden. We find no employment effects for existing firms and can rule out that a 1 percentage point payroll tax reduction would increase employment with more than 0.2 percent. We do, however, find that tax reductions have significantly positive effects on the average wage bill per employee. These are likely to be driven by higher average wages, but might also be due to more hours worked. As a sensitivity check we investigate if reduced payroll taxes affect the likelihood of firm entry and exit, and find some support for a net firm inflow. Our attempts to assess concomitant effects on employment indicate that payroll tax reductions might yield increases in employment through the start-up of new firms.

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Bibliographic Info

Paper provided by IFAU - Institute for Evaluation of Labour Market and Education Policy in its series Working Paper Series with number 2008:19.

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Length: 33 pages
Date of creation: 05 Sep 2008
Date of revision:
Handle: RePEc:hhs:ifauwp:2008_019

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Postal: IFAU, P O Box 513, SE-751 20 Uppsala, Sweden
Phone: (+46) 18 - 471 70 70
Fax: (+46) 18 - 471 70 71
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Keywords: Payroll tax; Labour demand; Incidence; Firm entry/exit; Difference-in-Differences;

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References

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  1. Steve J. Davis & John Haltiwanger, 1991. "Gross job creation, gross job destruction and employment reallocation," Working Paper Series, Macroeconomic Issues 91-5, Federal Reserve Bank of Chicago.
  2. Gilbert E. Metcalf, 2006. "Tax Incidence," Discussion Papers Series, Department of Economics, Tufts University 0607, Department of Economics, Tufts University.
    • Fullerton, Don & Metcalf, Gilbert E., 2002. "Tax incidence," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 26, pages 1787-1872 Elsevier.
  3. Frode Johansen & Tor Jacob Klette, 1997. "Wage and Employment Effects of Payroll Taxes and Investment Subsidies," Discussion Papers 194, Research Department of Statistics Norway.
  4. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S72-101, July.
  5. Murphy, Kevin J., 2007. "The impact of unemployment insurance taxes on wages," Labour Economics, Elsevier, vol. 14(3), pages 457-484, June.
  6. Holmlund, Bertil, 1983. " Payroll Taxes and Wage Inflation: The Swedish Experience," Scandinavian Journal of Economics, Wiley Blackwell, vol. 85(1), pages 1-15.
  7. Anderson, Patricia M. & Meyer, Bruce D., 2000. "The effects of the unemployment insurance payroll tax on wages, employment, claims and denials," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 81-106, October.
  8. Ossi Korkeamäki & Roope Uusitalo, 2004. "Employment effects of a payroll tax cut – Evidence from a regional tax subsidy experiment," ERSA conference papers ersa04p350, European Regional Science Association.
  9. Anderson, Patricia M. & Meyer, Bruce D., 1997. "The effects of firm specific taxes and government mandates with an application to the U.S. unemployment insurance program," Journal of Public Economics, Elsevier, vol. 65(2), pages 119-145, August.
  10. Bingley, Paul & Lanot, Gauthier, 2002. "The incidence of income tax on wages and labour supply," Journal of Public Economics, Elsevier, vol. 83(2), pages 173-194, February.
  11. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June.
  12. Bohm, Peter & Lind, Hans, 1993. "Policy evaluation quality : A quasi-experimental study of regional employment subsidies in Sweden," Regional Science and Urban Economics, Elsevier, vol. 23(1), pages 51-65, March.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. "A tax on jobs" - experimental evidence
    by chris dillow in Stumbling and Mumbling on 2010-04-08 13:08:10
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Cited by:
  1. Jarkko Harju & Tuomas Kosonen, 2013. "The Impact of Tax Incentives on the Economic Activity of Entrepreneurs," CESifo Working Paper Series 4259, CESifo Group Munich.
  2. Clément Carbonnier & Bruno Palier & Michaël Zemmour, 2014. "Tax cuts or social investment? Evaluating the opportunity cost of the French employment strategy," Sciences Po publications 31, Sciences Po.
  3. Moretti, Enrico, 2011. "Local Labor Markets," Handbook of Labor Economics, Elsevier.
  4. Eliasson, Tove & Nordström Skans, Oskar, 2014. "Negotiated wage increases and the labor market outcomes of low-wage workers: evidence from the Swedish public sector," Working Paper Series 2014:10, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  5. Egebark, Johan & Kaunitz, Niklas, 2013. "Do payroll tax cuts raise youth employment?," Working Paper Series 2013:27, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  6. Stenkula, Mikael, 2009. "Taxation and Entrepreneurship in a Welfare State," Working Paper Series 800, Research Institute of Industrial Economics.
  7. Cahuc, Pierre & Carcillo, Stéphane & Le Barbanchon, Thomas, 2014. "Do Hiring Credits Work in Recessions? Evidence from France," IZA Discussion Papers 8330, Institute for the Study of Labor (IZA).
  8. Sachs, Andreas, 2010. "A Bayesian approach to determine the impact of institutions on the unemployment rate," ZEW Discussion Papers 10-058, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  9. Skedinger, Per, 2014. "Effects of Payroll Tax Cuts for Young Workers," Working Paper Series 1031, Research Institute of Industrial Economics.

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