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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

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.

Suggested Citation

  • Maarten Goos & Jozef Konings, 2007. "The Impact of Payroll Tax Reductions on Employment and Wages: A Natural Experiment Using Firm Level Data," LICOS Discussion Papers 17807, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  • Handle: RePEc:lic:licosd:17807
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    File URL: http://www.econ.kuleuven.be/licos/publications/dp/dp178.pdf
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    Cited by:

    1. Andrea ALBANESE & Bart COCKX, 2015. "Permanent Wage Cost Subsidies for Older Workers. An Effective Tool for Increasing Working Time and Postponing Early Retirement?," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2015006, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    2. Huttunen, Kristiina & Pirttilä, Jukka & Uusitalo, Roope, 2013. "The employment effects of low-wage subsidies," Journal of Public Economics, Elsevier, pages 49-60.
    3. Binnur Balkan & Seyit M|min Cilasun & Belgi Turan, 2016. "The Impact of the Turkish Employment Subsidy Programs on Increasing the Level of Social Protection For Women," Working Papers 1022, Economic Research Forum, revised Jun 2016.
    4. Asma Raies, 2012. "Do pro-employment public policies matter?," Economics Bulletin, AccessEcon, vol. 32(3), pages 2442-2452.
    5. Binnur Balkan & Yusuf Soner Baskaya & Semih Tumen, 2014. "Evaluating the Impact of the Post-2008 Employment Subsidy Program in Turkey," Working Papers 1414, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    6. Rita Almeida & Larry Orr & David Robalino, 2014. "Wage subsidies in developing countries as a tool to build human capital: design and implementation issues," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 3(1), pages 1-24, December.
    7. Sjögren, Anna & Vikström, Johan, 2015. "How long and how much? Learning about the design of wage subsidies from policy changes and discontinuities," Labour Economics, Elsevier, vol. 34(C), pages 127-137.

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