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Employment and wage effects of a payroll-tax cut—evidence from a regional experiment

International Tax and Public Finance volume 16, Article number: 753 (2009) Cite this article

Abstract

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.

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Authors and Affiliations

  1. Government Institute for Economic Research, PO Box 1279, 00101, Helsinki, Finland

    Ossi Korkeamäki & Roope Uusitalo

  2. Institute for Labor Market Policy Evaluation, Uppsala, Sweden

    Roope Uusitalo

Authors
  1. Ossi Korkeamäki
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  2. Roope Uusitalo
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Correspondence to Roope Uusitalo.

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Korkeamäki, O., Uusitalo, R. Employment and wage effects of a payroll-tax cut—evidence from a regional experiment. Int Tax Public Finance 16, 753 (2009). https://doi.org/10.1007/s10797-008-9088-6

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  • DOI: https://doi.org/10.1007/s10797-008-9088-6

Keywords

  • Payroll tax
  • Labor demand
  • Tax incidence
  • Propensity score matching

JEL Classification

  • H22
  • J23
  • J32