The Impact of Payroll Tax Reductions on Employment and Wages: A Natural Experiment using Firm Level Data

LICOS Centre for Institutions and Economic Performance Discussion Paper No. 178/2007

Posted: 19 Jan 2007

See all articles by Maarten Goos

Maarten Goos

KU Leuven - Faculty of Business and Economics (FEB)

Jozef Konings

Catholic University of Leuven (KUL) - LICOS - Centrum voor Transitie-economie; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: January 2007

Abstract

Past evidence on the incidence of payroll tax subsidies on employment and wages for disadvantaged workers has been quite mixed. Therefore, this paper makes use of a unique panel of firm level data and a natural experiment to analyze the incidence of wage subsidies on full-time manual workers and pre-tax wages. Using a number of straightforward evaluation estimators we find that employment subsidies increased full-time manual employment and pre-tax wages. Moreover, we find that employment subsidies have increased employment but not wages by more in low-wage exporting industries. This is line with a textbook description of labor markets where it is predicted that the incidence of employment subsidies on employment and wages is larger the more elastic is product and therefore labor demand and where the employment effect is larger and the wage effect is smaller the more elastic is labor supply because of a binding minimum wage.

Suggested Citation

Goos, Maarten and Konings, Jozef, The Impact of Payroll Tax Reductions on Employment and Wages: A Natural Experiment using Firm Level Data (January 2007). LICOS Centre for Institutions and Economic Performance Discussion Paper No. 178/2007, Available at SSRN: https://ssrn.com/abstract=958027 or http://dx.doi.org/10.2139/ssrn.958027

Maarten Goos (Contact Author)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

HOME PAGE: http://www.econ.kuleuven.be/maarten.goos

Jozef Konings

Catholic University of Leuven (KUL) - LICOS - Centrum voor Transitie-economie ( email )

Waaistraat 6 - box 3511
Leuven, 3000
Belgium
+32 16 326 589 (Phone)
+32 16 326 599 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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