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  3. 2022
  4. Preliminary Program
  5. The Impact of Payroll Tax Subsidies: Theory and Evidence
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The Impact of Payroll Tax Subsidies: Theory and Evidence

Paper Session

Saturday, Jan. 8, 2022 12:15 PM - 2:15 PM (EST)

Hosted By: American Economic Association
  • Chair: Richard Blundell, University College London

Labor Demand Response to Labor Supply Incentives: Evidence from the German Mini-Job Reform

Gabriela Galassi
,
Bank of Canada

Abstract

This paper analyzes how firms respond to changes in tax benefits for low-earning workers and how, through equilibrium effects, such policies also affect non-targeted, high-earning workers. I explore firm-level outcomes around the Mini-Job Reform in Germany in 2003, which entailed a significant expansion of tax benefits for low-earning workers. Firm responses are decomposed in terms of scale effects arising from lower labor costs and substitution effects due to changes in relative prices of low-earning and high-earning labor. Using a differences-in-differences approach I document that establishments with a high intensity of low-earning workers prior to the reform expand relative to low-intensity establishments. This relative expansion is biased towards the type of workers not targeted by the tax benefits. In addition, establishments initially less intensive in low-earning workers substitute employment towards low-earning workers without expanding at the same pace. My findings are consistent with a model of the labor market which features tax sharing between workers and firms and simultaneous shifts in labor supply and demand after changes in tax benefits for low-earning workers. In this setting, there is a reallocation of employment and production from firms initially less intensive in low-earning workers to firms with a high pre-reform intensity. These equilibrium effects across different types of workers and firms are relevant for the design of labor market policies targeting low-earning workers.
​

The Contribution of Payroll Taxation to Wage Inequality in France

Antonie Bozio
,
Paris School of Economics
Thomas Breda
,
Paris School of Economics
Malka Guillot
,
ETH Zurich

Abstract

Over the 1967–2015 period, net wage inequality has decreased in France by 25%, in contrast to the significant increase experienced by most developed countries. Less well known is the fact that labor cost inequality has actually increased by 8% over the same period. We show that, (a) standard demand-side explanations for the rise in inequality apply in France when tested using measures of labor cost (as they should be); (b) reforms to payroll taxation, jointly with increases in the minimum wage, can explain a large part of the decrease in net wage inequality, in the context of increasing market inequality.

Payroll Tax Reductions for Minimum Wage Workers: Relative Labor Cost or Cash Windfall Effects?

Sophie Cottet
,
Paris School of Economics

Abstract

This paper uses administrative employer-employee data to uncover the effects of a large payroll tax reduction for minimum-wage workers in France in the 1990s. Exploiting the change in labor costs both at the job level and at the firm level, I find that the number of minimum-wage jobs increases but that these additional jobs stem exclusively from firms which had previously very few or no minimum wage workers. On the other hand, firms which already employed workers at minimum-wage levels initially, and thus benefit ex ante from a cash windfall, increase employment irrespective of wage levels. These results show that not all firms react to changes in relative labor costs and highlight the importance of alleviating liquidity constraints for firm growth.

Firm Heterogeneity and the Impact of Payroll Taxes

Aniko Biro
,
Centre for Economic and Regional Studies
Reka Branyiczki
,
Central European University
Attila Lindner
,
University College London
Lili Mark
,
Central European University
Daniel Prinz
,
Harvard University

Abstract

We study the impact of a large payroll tax cut for both younger and older workers in Hungary. Motivated by the prediction of standard equilibrium job search models we also study the heterogeneous impact of the policy by firm quality. We find that employment increases in response to the payroll tax cut, but the effects differ by firm characteristics. Employment increases most at low-productivity firms, which tend to hire from unemployment, while the effects are more muted for high-productivity firms, especially for older workers. At the same time, we find a significant increase in wages for older workers at high-productivity firms. These results point to important heterogeneity in the incidence of payroll tax subsidies by firm type and highlight that payroll taxes can change the composition of jobs in the labor market.

Discussant(s)
Thomas Le Barbanchon
,
Bocconi University
Richard Blundell
,
University College London
Matthew Gudgeon
,
United States Military Academy
Jesse Rothstein
,
University of California-Berkeley
JEL Classifications
  • H2 - Taxation, Subsidies, and Revenue
  • J3 - Wages, Compensation, and Labor Costs