Hysteresis from Employer Subsidies

27 Pages Posted: 24 Jun 2019 Last revised: 13 Oct 2019

See all articles by Emmanuel Saez

Emmanuel Saez

University of California, Berkeley

Benjamin Schoefer

University of California, Berkeley

David Seim

Stockholm University; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: June 24, 2019

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, reflecting spillovers or cohort effects. Two years after the repeal, the treated groups' employment remains elevated at the maximal reform level. A fiscal implication is that the youth employment effects of the reform per dollar of the payroll tax cut are three times larger in the long-term than in the short-term, and when taking into account hysteresis.

JEL Classification: H22, H32, J23

Suggested Citation

Saez, Emmanuel and Schoefer, Benjamin and Seim, David, Hysteresis from Employer Subsidies (June 24, 2019). Available at SSRN: https://ssrn.com/abstract=3409091 or http://dx.doi.org/10.2139/ssrn.3409091

Emmanuel Saez

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Benjamin Schoefer

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

David Seim (Contact Author)

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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