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Payroll Tax Reductions for Minimum Wage Workers: Relative Labor Cost or Cash Windfall Effects?

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  • Sophie Cottet

Abstract

This paper uses administrative employer-employee data to uncover the effects of a large payroll tax reduction for minimum-wage workers in France. Exploiting the change in labor costs both at the job level and at the firm level, I find that the policy spurred an additional 13 percentage points increase in the number of minimum-wage jobs, and that these extra jobs stem exclusively from firms which had previously very few or no minimum-wage workers. On the other hand, firms which already employed workers at minimum-wage levels, and therefore benefit ex ante from a cash windfall, increase employment irrespective of wage levels. These firms grow by an additional 4 percent in the first two years following the reform. This effect is stronger in liquidity-constrained and credit-constrained firms. Overall, these results show that not all firms react to changes in relative labor costs and highlight the importance of alleviating liquidity constraints for firm growth.

Suggested Citation

  • Sophie Cottet, 2024. "Payroll Tax Reductions for Minimum Wage Workers: Relative Labor Cost or Cash Windfall Effects?," CESifo Working Paper Series 11076, CESifo.
    • Handle: RePEc:ces:ceswps:_11076
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    More about this item

    Keywords

    payroll taxes; firm behaviour; rent sharing; minimum wage;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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