Hysteresis from Employer Subsidies

30 Pages Posted: 17 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: October 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. Two years after the repeal, employment remains elevated at the maximal reform level in the formerly subsidized ages. These hysteresis effects triple the direct employment effects of the reform. Discrimination against young workers in job posting fell during the reform and does not bounce back after repeal, potentially explaining our results.

Suggested Citation

Saez, Emmanuel and Schoefer, Benjamin and Seim, David, Hysteresis from Employer Subsidies (October 2019). CEPR Discussion Paper No. DP14052. Available at SSRN: https://ssrn.com/abstract=3471246

Emmanuel Saez (Contact Author)

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

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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