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Employment and Wage Effects of a Payroll-Tax Cut-Evidence from a Regional 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 for three years in Northern Finland. We match each firm in the target region with a similar firm in a comparison 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 the payroll-taxes led to an increase in wages in the target region. The point estimates indicate that the increase in wages offset roughly half of the impact of the payroll tax cut on the labor costs. The remaining labor cost reduction had no significant effects on employment. JEL-codes: J18, J23, J38, J58, J65, J6

Suggested Citation

  • Korkeamäki, Ossi & Uusitalo, Roope, 2008. "Employment and Wage Effects of a Payroll-Tax Cut-Evidence from a Regional Experiment," Discussion Papers 443, VATT Institute for Economic Research.
    • Handle: RePEc:fer:dpaper:443
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    References listed on IDEAS

    as
    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. Roope Uusitalo, 2005. "Do Centralized Bargains Lead to Wage Moderation? Time-Series Evidence from Finland," Springer Books, in: Hannu Piekkola & Kenneth Snellman (ed.), Collective Bargaining and Wage Formation, pages 121-132, Springer.
    3. 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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    5. Murphy, Kevin J., 2007. "The impact of unemployment insurance taxes on wages," Labour Economics, Elsevier, vol. 14(3), pages 457-484, June.
    6. Edward P. Lazear & Kathryn L. Shaw, 2007. "Wage Structure, Raises and Mobility: International Comparisons of the Structure of Wages Within and Across Firms," NBER Working Papers 13654, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Payroll-tax; Labor 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;
    All these keywords.

    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
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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