Hysteresis from Employer Subsidies
27 Pages Posted: 24 Jun 2019 Last revised: 13 Oct 2019
Date Written: June 24, 2019
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: Suggested Citation