Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1001: Payroll Taxes and Youth Labor Demand

Johan Egebark () and Niklas Kaunitz ()
Additional contact information
Johan Egebark: Research Institute of Industrial Economics (IFN)
Niklas Kaunitz: Department of Economics, Stockholm University

Abstract: In 2007, the Swedish employer-paid payroll tax was reduced substantially for young workers. We estimate the labor market response for different ages, and at different phases of the business cycle. The overall impact on employment and wages is relatively small, implying an average labor demand elasticity for young workers at around –0.32. While the effect on wages is consistently small, the employment effect differs markedly across ages and over the business cycle. For 21–22 year-old workers, the employment increase is 4–5 times larger than for 25-year-olds, and the estimated demand elasticities are strongly procyclical, approaching zero in the deep 2009 recession. These results suggest that payroll tax reductions need to be narrowly targeted, and carefully timed, in order to be effective. In addition, we find that the payroll tax reduction had no effects on hours worked. There is also little evidence that the employment effect for an individual remained when she was no longer eligible for the tax reduction.

Keywords: Payroll taxes; Labor demand; Youth Employment; Labor demand elasticity; Age heterogeneity; Business Cycle; Wage shifting; Tax subsidy

JEL-codes: H22; H25; H32; J23; J38; J68

50 pages, First version: January 3, 2014. Revised: June 7, 2017. Earlier revisions: June 7, 2017.

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