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The Employment Effects of Low-Wage Subsidies

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Author Info

  • Huttunen, Kristiina

    ()
    (Aalto University)

  • Pirttilä, Jukka

    ()
    (Labour Institute for Economic Research)

  • Uusitalo, Roope

    ()
    (HECER)

Abstract

Low-wage subsidies are often proposed as a solution to the unemployment problem among the low skilled. Yet the empirical evidence on the effects of low-wage subsidies is surprisingly scarce. This paper examines the employment effects of a Finnish payroll tax subsidy scheme, which is targeted at the employers of older, full-time, low-wage workers. The system's clear eligibility criteria open up an opportunity for a reliable estimation of the causal impacts of the subsidy, using a difference-in-difference-in-differences approach. Our results indicate that the subsidy system had no effects on the employment rate. However, it appears to have increased the probability of part-time workers obtaining full-time employment.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4931.

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Length: 34 pages
Date of creation: May 2010
Date of revision:
Publication status: published in: Journal of Public Economics, 2013, 97, 49–60
Handle: RePEc:iza:izadps:dp4931

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Keywords: social security contributions; employment; low-wage subsidies;

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  1. David Card & Dean R. Hyslop, 2005. "Estimating the Effects of a Time-Limited Earnings Subsidy for Welfare-Leavers," Econometrica, Econometric Society, Econometric Society, vol. 73(6), pages 1723-1770, November.
  2. Edlin Aaron S. & Phelps Edmund, 2009. "Getting Serious about Job Creation: Part I," The Economists' Voice, De Gruyter, De Gruyter, vol. 6(5), pages 1-5, April.
  3. Holmlund, B. & Kolm, A.S., 1995. "Progressive Taxation, Wage Setting, and Unemployment , Theory and Swedish Evidence," Papers, Uppsala - Working Paper Series 1995-15, Uppsala - Working Paper Series.
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  5. Koskela, Erkki & Vilmunen, Jouko, 1996. "Tax progression is good for employment in popular models of trade union behaviour," Labour Economics, Elsevier, Elsevier, vol. 3(1), pages 65-80, August.
  6. Jackman, Richard & Layard, Richard, 1990. " The Real Effects of Tax-Based Incomes Policies," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 92(2), pages 309-24.
  7. Brian Bell & Richard Blundell & John Reenen, 1999. "Getting the Unemployed Back to Work: The Role of Targeted Wage Subsidies," International Tax and Public Finance, Springer, Springer, vol. 6(3), pages 339-360, August.
  8. Kramarz, Francis & Philippon, Thomas, 2001. "The impact of differential payroll tax subsidies on minimum wage employment," Journal of Public Economics, Elsevier, Elsevier, vol. 82(1), pages 115-146, October.
  9. Andreas Knabe & Ronnie Schöb, 2008. "Minimum Wages and their Alternatives: A Critical Assessment," CESifo Working Paper Series 2494, CESifo Group Munich.
  10. Brown, Alessio J G & Merkl, Christian & Snower, Dennis J., 2007. "Comparing the Effectiveness of Employment Subsidies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6334, C.E.P.R. Discussion Papers.
  11. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, American Economic Association, vol. 84(3), pages 622-41, June.
  12. Andreas Knabe & Ronnie Schöb & Joachim Weimann, 2006. "Marginal Employment Subsidization: A New Concept and a Reappraisal," CESifo Working Paper Series 1707, CESifo Group Munich.
  13. Blundell, Richard, 2006. "Earned income tax credit policies: Impact and optimality: The Adam Smith Lecture, 2005," Labour Economics, Elsevier, Elsevier, vol. 13(4), pages 423-443, August.
  14. Bovenberg, A Lans & de Mooij, Ruud A & Graafland, Johan J, 1998. "Tax Reform and the Dutch Labour Market: An Applied General Equilibrium Approach," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1983, C.E.P.R. Discussion Papers.
  15. Lawrence F. Katz, 1996. "Wage Subsidies for the Disadvantaged," NBER Working Papers 5679, National Bureau of Economic Research, Inc.
  16. Nada Eissa & Jeffrey B. Liebman, 1995. "Labor Supply Response to the Earned Income Tax Credit," NBER Working Papers 5158, National Bureau of Economic Research, Inc.
  17. Phelps, Edmund S, 1994. "Low-Wage Employment Subsidies versus the Welfare State," American Economic Review, American Economic Association, American Economic Association, vol. 84(2), pages 54-58, May.
  18. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521497695.
  19. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, Elsevier, vol. 52(1), pages 1-29, August.
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Citations

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Cited by:
  1. Skedinger, Per, 2014. "Effects of Payroll Tax Cuts for Young Workers," Working Paper Series, Research Institute of Industrial Economics 1031, Research Institute of Industrial Economics.
  2. Egebark, Johan & Kaunitz, Niklas, 2014. "Do payroll tax cuts raise youth employment?," Research Papers in Economics, Stockholm University, Department of Economics 2014:1, Stockholm University, Department of Economics.
  3. Michael Lechner & Benjamin Schünemann & Conny Wunsch, 2013. "Do Long-term Unemployed Workers Benefit from Targeted Wage Subsidies?," Working papers, Faculty of Business and Economics - University of Basel 2013/14, Faculty of Business and Economics - University of Basel.
  4. 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.
  5. Asma Raies, 2012. "Do pro-employment public policies matter?," Economics Bulletin, AccessEcon, vol. 32(3), pages 2442-2452.
  6. Deuchert, Eva & Kauer, Lukas, 2013. "Hiring subsidies for people with a disability: Helping or hindering? - Evidence from a small scale social field experiment," Economics Working Paper Series 1335, University of St. Gallen, School of Economics and Political Science.

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