Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2014:1: Do payroll tax cuts raise youth employment?

Johan Egebark () and Niklas Kaunitz ()
Additional contact information
Johan Egebark: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Niklas Kaunitz: SOFI, Postal: The Swedish Institute for Social Research (SOFI) , Stockholm University, S-106 91 Stockholm, Sweden

Abstract: In 2007, the Swedish employer-paid payroll tax was cut on a large scale for young workers, substantially reducing labor costs for this group. Using Diff erence-in-Differences paired with exact matching, we estimate a small impact, both on employment and on wages, implying a labor demand elasticity for young workers at around -0.31. Since the tax reduction applied also to existing employments, the cost of the reform was sizable, and the estimated cost per created job is at more than four times that of directly hiring workers at the average wage. Hence, we conclude that payroll tax cuts are an inefficient way to boost employment for young individuals.

Keywords: Youth unemployment; Payroll tax; Tax subsidy; Labor costs; Exact matching

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

43 pages, January 30, 2014

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