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Employment Effects of a Payroll-Tax Cut: Evidence from a Regional Tax Exemption Experiment

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  • Korkeamäki, Ossi
  • Uusitalo, Roope

Abstract

In this paper we evaluate the effects of a regional experiment that reduced payroll taxes by 3-6 percentage points in Northern Finland for three years. We match each firm in the target region with a similar firm in the control region and estimate the effect of the payroll-tax reduction by comparing employment and wage changes within the matched pairs before and after the start of the experiment. According to our results the reduction in payroll taxes led to somewhat faster wage growth in the target region. The increase in wages offset roughly half of the impact of the payroll-tax cut on the labour costs. The remaining labour cost reduction had no significant effects on employment.

Suggested Citation

  • Korkeamäki, Ossi & Uusitalo, Roope, 2006. "Employment Effects of a Payroll-Tax Cut: Evidence from a Regional Tax Exemption Experiment," Discussion Papers 407, VATT Institute for Economic Research.
  • Handle: RePEc:fer:dpaper:407
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    File URL: https://www.doria.fi/handle/10024/148390
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    References listed on IDEAS

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    1. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 72-101, July.
    2. Frode Johansen & Tor Jacob Klette, 1997. "Wage and Employment Effects of Payroll Taxes and Investment Subsidies," Discussion Papers 194, Statistics Norway, Research Department.
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    Keywords

    Payroll-tax; labour demand; tax incidence; propensity score matching; Labour market; Työmarkkinat; Regional development; Aluekehitys; Taxation; Verotus; Labor market and policies promoting economic growth; Työmarkkinat ja kasvua tukeva politiikka; J180 - Demographic Economics: Public Policy; J230 - Employment Determination; Job Creation; Demand for Labor; Self-Employment; J380 - Wages; Compensation; and Labor Costs: Public Policy (wage subsidies; minimum wage legislation); J580 - Labor-Management Relations; Trade Unions; and Collective Bargaining: Public Policy; J650 - Unemployment Insurance; Severance Pay; Plant Closings; J680 - Mobility; Unemployment; and Vacancies: Public Policy (Employment Services);

    JEL classification:

    • J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J58 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Public Policy
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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