Employment and wage effects of a payroll-tax cut—evidence from a regional experiment
- 625 Downloads
In this paper, we evaluate the effects of a regional experiment that reduced payroll taxes by 3–6 percentage points for 3 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.
KeywordsPayroll tax Labor demand Tax incidence Propensity score matching
JEL ClassificationH22 J23 J32
- Bennmaker, H., Mellander, E., & Öckert, B. (2007). Do payroll tax deductions boost employment? (Mimeo). Institute for Labour Market Evaluation, Uppsala. Google Scholar
- Bohm, P., & Lind, H. (1989). Sysselsättningseffekter av sänkt arbetsgivaravgift i Norrbotten/Svappavaara: metodbeskrivning (SIND PM 1984:2). Stockholm. Google Scholar
- Diamond, A., & Sekhon, J. S. (2006). Genetic matching for estimating causal effects: a general multivariate matching method for achieving balance in observational studies (Paper WP2006-35). Institute of Governmental Studies. Google Scholar
- Gruber, J. (1994). The incidence of mandated maternity benefits. American Economic Review, 84(3), 622–641. Google Scholar
- Johansen, F., & Klette, T. J. (1998). Wage and employment effects of payroll taxes and investment subsidies (Memorandum 27/1998). Department of Economics, University of Oslo. Google Scholar
- Hamermesh, D. (1993). Labor demand. Princeton: Princeton University Press. Google Scholar
- KELA (2003). Statistical yearbook of the social insurance institution. Finland, T1:38. Google Scholar
- Korkeamäki, O., & Uusitalo, R. (2004). Työnantajan sosiaaliturvamaksusta vapauttamisen alueellisen kokeilun työllisyysvaikutukset, Väliraportti I (Discussion Papers 194). Labour Institute for Economic Research, Helsinki. Google Scholar
- Korkeamäki, O., & Uusitalo, R. (2008). Employment and wage effects of payroll tax cut—evidence from a regional experiment (Working Paper 443). Government Institute for Economic Research. Available online http://www.vatt.fi/file/vatt_publication_pdf/k443.pdf.
- Uusitalo, R. (2005). Do centralized bargains lead to wage moderation? Time-series evidence from Finland. In H. Piekkola & K. Snellman (Eds.), Collective bargaining and wage formation. Heidelberg: Physica. Google Scholar
- Uusitalo, R., & Vartiainen, J. (2008, in press). Finland: firm factors in wages and wage changes. In E. Lazear & K. Shaw (Eds.), Wage structure, raises and mobility: international comparisons of the structure of wages within and across firms. Chicago: University of Chicago Press. Google Scholar