IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp4931.html
   My bibliography  Save this paper

The Employment Effects of Low-Wage Subsidies

Author

Listed:
  • Huttunen, Kristiina

    (Aalto University)

  • Pirttilä, Jukka

    (Labour Institute for Economic Research)

  • Uusitalo, Roope

    (University of Helsinki)

Abstract

Low-wage subsidies are often proposed as a solution to the unemployment problem among the low skilled. Yet the empirical evidence on the effects of low-wage subsidies is surprisingly scarce. This paper examines the employment effects of a Finnish payroll tax subsidy scheme, which is targeted at the employers of older, full-time, low-wage workers. The system's clear eligibility criteria open up an opportunity for a reliable estimation of the causal impacts of the subsidy, using a difference-in-difference-in-differences approach. Our results indicate that the subsidy system had no effects on the employment rate. However, it appears to have increased the probability of part-time workers obtaining full-time employment.

Suggested Citation

  • Huttunen, Kristiina & Pirttilä, Jukka & Uusitalo, Roope, 2010. "The Employment Effects of Low-Wage Subsidies," IZA Discussion Papers 4931, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp4931
    as

    Download full text from publisher

    File URL: https://docs.iza.org/dp4931.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Brown, Alessio J.G. & Merkl, Christian & Snower, Dennis J., 2011. "Comparing the effectiveness of employment subsidies," Labour Economics, Elsevier, vol. 18(2), pages 168-179, April.
    2. Blundell, Richard, 2006. "Earned income tax credit policies: Impact and optimality: The Adam Smith Lecture, 2005," Labour Economics, Elsevier, vol. 13(4), pages 423-443, August.
    3. Andreas Knabe & Ronnie Schöb, 2008. "Minimum Wages and their Alternatives: A Critical Assessment," CESifo Working Paper Series 2494, CESifo.
    4. Nada Eissa & Jeffrey B. Liebman, 1996. "Labor Supply Response to the Earned Income Tax Credit," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(2), pages 605-637.
    5. Andreas Knabe & Ronnie Schöb & Joachim Weimann, 2006. "Marginal Employment Subsidization: A New Concept and a Reappraisal," Kyklos, Wiley Blackwell, vol. 59(4), pages 557-577, November.
    6. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 72-101, July.
    7. Bovenberg, A. Lans & Graafland, Johan J. & de Mooij, Ruud A., 2000. "Tax reform and the Dutch labor market: an applied general equilibrium approach," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 193-214, October.
    8. Phelps, Edmund S, 1994. "Low-Wage Employment Subsidies versus the Welfare State," American Economic Review, American Economic Association, vol. 84(2), pages 54-58, May.
    9. Kramarz, Francis & Philippon, Thomas, 2001. "The impact of differential payroll tax subsidies on minimum wage employment," Journal of Public Economics, Elsevier, vol. 82(1), pages 115-146, October.
    10. Holmlund, B. & Kolm, A.S., 1995. "Progressive Taxation, Wage Setting and Unemployment - Theory and Swedish Evidence," Papers 15, Uppsala - Working Paper Series.
    11. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
    12. Ossi Korkeamäki & Roope Uusitalo, 2009. "Employment and wage effects of a payroll-tax cut—evidence from a regional experiment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(6), pages 753-772, December.
    13. Koskela, Erkki & Vilmunen, Jouko, 1996. "Tax progression is good for employment in popular models of trade union behaviour," Labour Economics, Elsevier, vol. 3(1), pages 65-80, August.
    14. Ben Lockwood & Alan Manning, 1993. "Wage Setting and the Tax System: theory and Evidence for the UK," CEP Discussion Papers dp0115, Centre for Economic Performance, LSE.
    15. repec:bla:scandj:v:92:y:1990:i:2:p:309-24 is not listed on IDEAS
    16. Jesse Rothstein, 2010. "Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 177-208, February.
    17. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, vol. 52(1), pages 1-29, August.
    18. Behaghel, Luc & Crépon, Bruno & Sédillot, Béatrice, 2008. "The perverse effects of partial employment protection reform: The case of French older workers," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 696-721, April.
    19. Danielle Venn, 2009. "Legislation, Collective Bargaining and Enforcement: Updating the OECD Employment Protection Indicators," OECD Social, Employment and Migration Working Papers 89, OECD Publishing.
    20. Brian Bell & Richard Blundell & John Reenen, 1999. "Getting the Unemployed Back to Work: The Role of Targeted Wage Subsidies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(3), pages 339-360, August.
    21. Lawrence F. Katz, 1996. "Wage Subsidies for the Disadvantaged," NBER Working Papers 5679, National Bureau of Economic Research, Inc.
    22. repec:lic:licosd:17807 is not listed on IDEAS
    23. Edlin Aaron S. & Phelps Edmund, 2009. "Getting Serious about Job Creation: Part I," The Economists' Voice, De Gruyter, vol. 6(5), pages 1-5, April.
    24. David Card & Dean R. Hyslop, 2005. "Estimating the Effects of a Time-Limited Earnings Subsidy for Welfare-Leavers," Econometrica, Econometric Society, vol. 73(6), pages 1723-1770, November.
    25. Bennmarker, Helge & Mellander, Erik & Öckert, Björn, 2009. "Do regional payroll tax reductions boost employment?," Labour Economics, Elsevier, vol. 16(5), pages 480-489, October.
    26. Chéron, Arnaud & Hairault, Jean-Olivier & Langot, François, 2008. "A quantitative evaluation of payroll tax subsidies for low-wage workers: An equilibrium search approach," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 817-843, April.
    27. Richard Blundell & Monica Costa Dias & Costas Meghir & John Van Reenen, 2004. "Evaluating the Employment Impact of a Mandatory Job Search Program," Journal of the European Economic Association, MIT Press, vol. 2(4), pages 569-606, June.
    28. Dreze, Jacques H. & Malinvaud, Edmond, 1994. "Growth and employment: The scope of a European initiative," European Economic Review, Elsevier, vol. 38(3-4), pages 489-504, April.
    29. Behaghel, Luc & Crépon, Bruno & Sédillot, Béatrice, 2008. "The perverse effects of partial employment protection reform: The case of French older workers," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 696-721, April.
    30. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-641, June.
    31. Sianesi, Barbara, 2008. "Differential effects of active labour market programs for the unemployed," Labour Economics, Elsevier, vol. 15(3), pages 370-399, June.
    32. Adda, Jérôme & Costa Dias, Mònica & Meghir, Costas & Sianesi, Barbara, 2007. "Labour market programmes and labour market outcomes: a study of the Swedish active labour market interventions," Working Paper Series 2007:27, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    33. Eissa, Nada & Hoynes, Hilary Williamson, 2004. "Taxes and the labor market participation of married couples: the earned income tax credit," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1931-1958, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andrea Albanese & Bart Cockx, 2015. "Permanent Wage Cost Subsidies For Older Workers. An Effective Tool For Increasing Working Time And Postponing Early Retirement?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 15/902, Ghent University, Faculty of Economics and Business Administration.
    2. Jukka Pirttilä & Håkan Selin, 2011. "Tax Policy and Employment: How Does the Swedish System Fare," Working Papers 267, Työn ja talouden tutkimus LABORE, The Labour Institute for Economic Research LABORE.
    3. Egebark, Johan & Kaunitz, Niklas, 2018. "Payroll taxes and youth labor demand," Labour Economics, Elsevier, vol. 55(C), pages 163-177.
    4. Binnur Balkan & Yusuf Soner Baskaya & Semih Tumen, 2014. "Evaluating the Impact of the Post-2008 Employment Subsidy Program in Turkey," Working Papers 1414, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    5. Evelina Gavrilova & Floris Zoutman & Arnt Ove Hopland, 2017. "How to Use One Instrument to Identify Two Elasticities," CESifo Working Paper Series 6379, CESifo.
    6. Benjamin Schünemann & Michael Lechner & Conny Wunsch, 2015. "Do Long-Term Unemployed Workers Benefit from Targeted Wage Subsidies?," German Economic Review, Verein für Socialpolitik, vol. 16(1), pages 43-64, February.
    7. Kory Kroft & Kavan Kucko & Etienne Lehmann & Johannes Schmieder, 2020. "Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach," American Economic Journal: Economic Policy, American Economic Association, vol. 12(1), pages 254-292, February.
    8. Vincent Charlet & Philippe Frocrain, 2017. "Les limites des allégements de charges sur les bas salaires," Working Papers hal-01695167, HAL.
    9. Egebark, Johan & Kaunitz, Niklas, 2013. "Do payroll tax cuts raise youth employment?," Working Paper Series 2013:27, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    10. Tito Boeri & Jan van Ours, 2013. "The Economics of Imperfect Labor Markets: Second Edition," Economics Books, Princeton University Press, edition 1, number 10142.
    11. Boeters, Stefan, 2011. "Optimal tax progressivity in unionised labour markets: What are the driving forces?," Economic Modelling, Elsevier, vol. 28(5), pages 2282-2295, September.
    12. Bertil Holmlund, 2002. "Labor Taxation in Search Equilibrium with Home Production," German Economic Review, Verein für Socialpolitik, vol. 3(4), pages 415-430, November.
    13. Lehmann, Etienne & Marical, François & Rioux, Laurence, 2013. "Labor income responds differently to income-tax and payroll-tax reforms," Journal of Public Economics, Elsevier, vol. 99(C), pages 66-84.
    14. Etienne Lehmann & Claudio Lucifora & Simone Moriconi & Bruno Van der Linden, 2016. "Beyond the labour income tax wedge: the unemployment-reducing effect of tax progressivity," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(3), pages 454-489, June.
    15. Neumann, M., 2017. "Earnings responses to social security contributions," Labour Economics, Elsevier, vol. 49(C), pages 55-73.
    16. repec:eee:labchp:v:3:y:1999:i:pc:p:3029-3084 is not listed on IDEAS
    17. Clément Carbonnier, 2015. "Payroll Taxation, qualifications, wages and unemployment rates in a frictional labor market with productive interactions between segments," Working Papers hal-01203122, HAL.
    18. Gabriela Galassi, 2021. "Labor Demand Response to Labor Supply Incentives: Lessons from the German Mini-Job Reform," Staff Working Papers 21-15, Bank of Canada.
    19. Clément Carbonnier, 2014. "Payroll Taxation and the structure of qualifications and wages in a segmented frictional labor market with intrafirm bargaining," THEMA Working Papers 2014-20, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    20. Galassi, Gabriela, 2021. "Labor Demand Response to Labor Supply Incentives: Lessons from the German Mini-Job Reform," IZA Discussion Papers 14248, Institute of Labor Economics (IZA).
    21. Hansen, Claus Thustrup & Pedersen, Lars Haagen & Slok, Torsten, 2000. "Ambiguous effects of tax progressivity -- theory and Danish evidence," Labour Economics, Elsevier, vol. 7(3), pages 335-347, May.

    More about this item

    Keywords

    employment; social security contributions; low-wage subsidies;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp4931. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Holger Hinte (email available below). General contact details of provider: https://edirc.repec.org/data/izaaade.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.