Employment Effects of a Payroll-Tax Cut: Evidence from a Regional Tax Exemption Experiment

• Main Authors: Korkeamäki, Ossi, Uusitalo, Roope
• Format: Report
• Language: unknown
• Subjects: Tukeva; Northern Finland
• Online Access: https://www.doria.fi/handle/10024/148390

In this paper we evaluate the effects of a regional experiment that reduced payroll taxes by 3-6 percentage points in Northern Finland for three years. We match each firm in the target region with a similar firm in the control region and estimate the effect of the payroll-tax reduction by comparing employment and wage changes within the matched pairs before and after the start of the experiment. According to our results the reduction in payroll taxes led to somewhat faster wage growth in the target region. The increase in wages offset roughly half of the impact of the payroll-tax cut on the labour costs. The remaining labour cost reduction had no significant effects on employment. Payroll-tax, labour demand, tax incidence, propensity score matching, Labour market, Työmarkkinat, Regional development, Aluekehitys, Taxation, Verotus, Labor market and policies promoting economic growth, Työmarkkinat ja kasvua tukeva politiikka, J180 - Demographic Economics: Public Policy, J230 - Employment Determination; Job Creation; Demand for Labor; Self-Employment, J380 - Wages, Compensation, and Labor Costs: Public Policy (wage subsidies, minimum wage legislation), J580 - Labor-Management Relations, Trade Unions, and Collective Bargaining: Public Policy, J650 - Unemployment Insurance; Severance Pay; Plant Closings, J680 - Mobility, Unemployment, and Vacancies: Public Policy (Employment Services)