Do Only Tax Incentives Matter? Labor Supply and Demand Responses to an Unusually Large and Salient Tax Break

Abstract

I explore labor supply responses to an unusually large and salient notch generated by the “Mini-Job” program in Germany. Using administrative data, I document three findings. First, despite the unusually large magnitude of incentives, earnings elasticities are modest, even after accounting for frictions. Second, the observed response cannot be fully attributed to labor supply alone; rather, the observed outcomes are highly dependent on the availability of jobs and, so are strongly influenced by labor demand incentives. Third, I show that these firm incentives are likely driven by the fact that mini-job workers receive lower fringe-benefit payments.

Keywords: Payroll Tax, Income Tax, Earnings Elasticity, Incidence, Fringe Benefits

JEL Classification: H20, H22, H24, H31, H32, J22, J23, J32, J38