Firms’ labor cost savings and recruitment of nonwestern immigrants: The unintended effect of a payroll tax reform

Immigrants have long faced great challenges in European labor markets, and policymakers in many countries are struggling to improve immigrants’ labor market integration. This paper evaluates whether a Swedish youth payroll tax cut had the unintended effect of promoting employment of nonwestern immigrants. The reform generated firm-level labor cost savings, which were proportional to the number of young employees at the time of the reform implementation. Utilizing matched employer-employee data, this study investigates the effect of these labor cost savings on the recruitment of nonwestern immigrants. The findings suggest a strong and positive link between firms’ labor cost savings and their subsequent hiring of first-generation nonwestern immigrants, which is largely driven by increased employment of older immigrants who were not targeted by the reform. Within the analyzed sample of firms, 1,100 jobs were created for this group, which corresponds to a net job creation that is more than proportionate to the group’s population share. The youth payroll tax reform thus had employment-promoting effects outside its target group, illustrating that general labor cost reductions can lower barriers against immigrant employment and enhance the labor market opportunities for non-western immigrants.