Working Paper No. 1001

Payroll Taxes and Youth Labor Demand

Published: January 3, 2014, revised June 2017Pages: 50Keywords: Payroll taxes; Labor demand; Youth unemployment; Labor demand elasticity; Age heterogeneity; Business cycle; Wage shifting; Tax subsidyJEL-codes: H22, H25, H32, J23, J38, J68

Payroll Taxes and Youth Labor Demand Johan Egebark and Niklas Kaunitz


In 2007, the Swedish employer-paid payroll tax was reduced substantially for young workers. We estimate the labor market response for different ages, and at different phases of the business cycle. The overall impact on employment and wages is relatively small, implying an average labor demand elasticity for young workers at around –0.32. While the effect on wages is consistently small, the employment effect differs markedly across ages and over the business cycle. For 21–22 year-old workers, the employment increase is 4–5 times larger than for 25-year-olds, and the estimated demand elasticities are strongly procyclical, approaching zero in the deep 2009 recession. These results suggest that payroll tax reductions need to be narrowly targeted, and carefully timed, in order to be effective. In addition, we find that the payroll tax reduction had no effects on hours worked. There is also little
evidence that the employment effect for an individual remained when she was no longer eligible for the tax reduction.

Johan Egebark

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Ph: +46 (0)732 54 29 26
johan.egebark@ifn.se

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