Working Paper: NBER ID: w25115
Authors: Hyejin Ku; Uta Schnberg; Ragnhild C. Schreiner
Abstract: In this paper, we evaluate the effectiveness of place-based payroll taxes in stimulating local employment by exploiting a unique policy setting in Norway, where a system of geographically differentiated payroll taxes was suddenly abolished due to an EU regulation. The reform was enforced independently of the regional labor market developments, creating arguably exogenous variation in the payroll tax rates that firms in different local labor markets faced over time. We find evidence of partial shifting of payroll tax increases on to worker wages as well as a significant decline in local employment. These findings suggest that in settings with some degrees of wage rigidity, place-based payroll tax incentives can be effective in stimulating local employment.
Keywords: place-based tax incentives; local employment; payroll taxes; Norway; wage rigidity
JEL Codes: D22; H25; H32; J18; J23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Payroll tax rate increase (H29) | Wages decline (J31) |
| Payroll tax rate increase (H29) | Local employment decline (J63) |
| Payroll tax rate increase (H29) | Wage passthrough rate (J31) |
| Wage passthrough rate (J31) | Wages decline (J31) |
| Payroll tax rate increase (H29) | Labor demand elasticity (J23) |
| Labor demand elasticity (J23) | Local employment decline (J63) |