Do regional payroll tax reductions boost employment?

Utilizing a Difference-in-Differences technique we assess the effects of a ten % points decrease in the payroll tax introduced in 2002 for organizations in the northern part of Sweden. We discover no employment effects for existing businesses and can rule out that a 1 % point payroll tax reduction would boost employment with more than 0.2 %. We do, however, find that tax reductions have considerably positive impact on the average wage bill per employee. These are probably driven by higher average wages, but could also be caused by more hours worked. As a sensitivity check we examine if reduced payroll taxes impact the probability of firm entry and exit, and find some support for a net firm inflow. Our efforts to assess concomitant effects on employment signify that payroll tax reductions might yield increases in employment through the start-up of new firms.

Source: Institute for Labour Market Policy Evaluation

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