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The Impact of Payroll Tax Reductions on Employment and Wages: A Natural Experiment Using Firm Level Data

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Maarten Goos
Jozef Konings

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Abstract

Past evidence on the incidence of payroll tax subsidies on employment and wages for disadvantaged workers has been quite mixed. Therefore, this paper makes use of a unique panel of firm level data and a natural experiment to analyze the incidence of wage subsidies on full-time manual workers and pre-tax wages. Using a number of straightforward evaluation estimators we find that employment subsidies increased full-time manual employment and pre-tax wages. Moreover, we find that employment subsidies have increased employment but not wages by more in low-wage exporting industries. This is line with a textbook description of labor markets where it is predicted that the incidence of employment subsidies on employment and wages is larger the more elastic is product and therefore labor demand and where the employment effect is larger and the wage effect is smaller the more elastic is labor supply because of a binding minimum wage.

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File URL: http://www.econ.kuleuven.ac.be/licos/DP/DP2007/DP178.pdf
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Paper provided by LICOS - Centre for Institutions and Economic Performance, K.U.Leuven in its series LICOS Discussion Papers with number 17807.

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Length: 31 pages
Date of creation: 2007
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Handle: RePEc:lic:licosd:17807

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  1. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January. [Downloadable!] (restricted)
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  2. Phelps, Edmund S, 1994. "Low-Wage Employment Subsidies versus the Welfare State," American Economic Review, American Economic Association, vol. 84(2), pages 54-58, May. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
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  4. Stephen Nickell, 2003. "Employment and Taxes," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  5. Lawrence F. Katz, 1996. "Wage Subsidies for the Disadvantaged," NBER Working Papers 5679, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Ben Lockwood & Alan Manning, 1993. "Wage Setting and the Tax System: theory and Evidence for the UK," CEP Discussion Papers dp0115, Centre for Economic Performance, LSE.
  7. David H. Autor & Frank Levy & Richard J. Murnane, 2003. "The Skill Content Of Recent Technological Change: An Empirical Exploration," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1279-1333, November. [Downloadable!] (restricted)
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  8. Maarten Goos & Alan Manning, 2003. "Lousy and Lovely Jobs: the Rising Polarization of Work in Britain," CEP Discussion Papers dp0604, Centre for Economic Performance, LSE. [Downloadable!]
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