Payroll tax reductions for the low paid

A review of different theoretical models confirms that economists of opposing beliefs find themselves agreeing about the usefulness of employment subsidies. In a country with a relatively high wage floor, they reduce the cost of labour for firms. In countries where wage floors are low, subsidies can increase the net real wage of workers. In both cases, employment is likely to rise. Generally, allowing the price system to perform its allocative function while pursuing distributive objectives through the tax system is welfare enhancing. It is therefore surprising that such a remedy has not yet been implemented on a large scale in all countries suffering from labour market problems. One reason is that there may be a problem of transition. Empirical evidence suggests that reductions in taxes on labour will not solve employment and distribution problems, but will, in the long run, promise progress in both.