More than 18,000 jobs created by lowering payroll taxes
Sven-Olov Daunfeldt, Anton Gidehag and Niklas Rudholm have investigated the effects on firms’ labor demand of a payroll tax cut for young employees in Sweden on July 1, 2007.
They argue that an overlooked aspect of the reform was that the payroll tax cut covered all young workers, and not only those who were recruited after the reform was implemented. Firms that initially had many young employees were thus able to reduce their labor costs substantially due to the payroll tax cut, which gave rise to both a substitution effect and a scale effect. The substitution effect incentivized employers to recruit young individuals because they became less costly to hire, while the labor cost savings reduced employers’ marginal cost of production and created a scale effect through which employers could recruit employees who were not explicitly targeted by the reform.
The results show that most employers received a small reduction in labor costs when the youth payroll tax cut was implemented. However, employers who received a large reduction in labor costs increased their number of employees significantly more than employers who received marginal reductions or no reductions at all. In total, the authors estimate that the 2007 payroll tax reform created 18,100 jobs over the period of 2006-2008. This implies that the payroll tax cut for young employees created a considerably larger number of jobs than reported in previous evaluations of the reform.
The paper can be downloaded here.
For more information please contact Professor Sven-Olov Daunfeldt, Head of Research at the Institute of Retail Economics. Email: firstname.lastname@example.org; Tel: +46 70 295 72 84