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Hysteresis from Employer Subsidies

Author

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  • Emmanuel Saez
  • Benjamin Schoefer
  • David Seim

Abstract

This paper uses administrative data to analyze a large and 8-year long employer payroll tax rate cut in Sweden for young workers aged 26 or less. First, we document that while active, the reform raised youth employment among the treated workers. The long-run effects are twice as large as the medium-run effects and likely driven by labor demand (as workers' take-home wages did not respond). Second, we document novel labor-demand-driven "hysteresis" from this policy – i.e. persistent employment effects even after the subsidy no longer applies – along two dimensions. Over the lifecycle, employment effects persist even after workers age out of eligibility. Two years after the repeal, employment remains elevated at the maximal reform level in the formerly subsidized ages. These hysteresis effects triple the direct employment effects of the reform. Discrimination against young workers in job posting fell during the reform and does not bounce back after repeal, potentially explaining our results.

Suggested Citation

  • Emmanuel Saez & Benjamin Schoefer & David Seim, 2019. "Hysteresis from Employer Subsidies," NBER Working Papers 26391, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26391
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    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J71 - Labor and Demographic Economics - - Labor Discrimination - - - Hiring and Firing

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