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

  • Ossi Korkeamäki
  • Roope Uusitalo

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.

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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 407.

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Date of creation: 21 Nov 2006
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Handle: RePEc:fer:dpaper:407
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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 S72-101, 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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