Scandinavian Working Papers in Economics

HFI Working Papers,
Institute of Retail Economics (Handelns Forskningsinstitut)

No 3: How do firms respond to reduced labor costs? Evidence from the 2007 Swedish payroll tax reform

Sven-Olov Daunfeldt (), Anton Gidehag () and Niklas Rudholm ()
Additional contact information
Sven-Olov Daunfeldt: Institute of Retail Economics (Handelns Forskningsinstitut), Postal: Handelns Forskningsinstitut, Regeringsgatan 60, 103 29 Stockholm, Sweden and Dalarna University, Falun, Sweden
Anton Gidehag: Institute of Retail Economics (Handelns Forskningsinstitut), Postal: Handelns Forskningsinstitut, Regeringsgatan 60, 103 29 Stockholm, Sweden and Örebro University, Örebro, Sweden
Niklas Rudholm: Institute of Retail Economics (Handelns Forskningsinstitut), Postal: Handelns Forskningsinstitut, Regeringsgatan 60, 103 29 Stockholm, Sweden

Abstract: One way for policymakers to reduce labor costs and stimulate the recruitment of marginalized groups of labor in a highly unionized economy is to lower payroll taxes. However, the efficiency of this policy instrument has been questioned, and previous evaluations have mostly found small employment effects for such reforms. We investigate the effects of a payroll tax cut in Sweden that decreased firms’ labor costs in relation to the number of young employees that they had employed when the reform was implemented in 2007. We find that most firms received small labor cost savings as a result of the reform, but those that received larger cost savings increased their number of employees significantly more than firms that received no, or minor, labor cost savings. Our findings also suggest that the payroll tax cut increased the total wages paid to incumbent workers, but the wage effect was too small to offset the positive extensive-margin employment effect of the reform. In total, we find that the Swedish payroll tax reform created 18,100 jobs over the period 2006-2008; most of these jobs were within the targeted group of young employees.

Keywords: Payroll tax reform; labor demand; employment; wages

JEL-codes: H25; H32; J23; J32; L20

54 pages, October 8, 2019

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