Employment and wage effects of a payroll-tax cut-evidence from a regional experiment

Abstract

In this paper, we evaluate the effects of a regional experiment that reduced payroll taxes by 3-6 percentage points for 3 years in northern Finland. We match each firm in the target region with a similar firm in a comparison region and estimate the effect of the payroll tax reduction by comparing employment and wage changes within the matched pairs before and after the start of the experiment. According to our results, the reduction in the payroll taxes led to an increase in wages in the target region. The point estimates indicate that the increase in wages offset roughly half of the impact of the payroll tax cut on the labor costs. The remaining labor cost reduction had no significant effects on employment. © Springer Science+Business Media, LLC 2008.