Employment and wage effects of payroll tax credits at different moments of the life cycle

A cost-benefit analysis shows that payroll tax receipts would increase if the tax rate for workers under 30 was reduced.

A cost-benefit analysis shows that payroll tax receipts would increase if the tax rate for workers under 30 was reduced.

Ferran Elias-Moreno is PhD candidate in Economics at the Columbia University in New-York. His fields of specialization are public Economics, labor Economics and political economy. In the context of these research themes, he wrote a paper titled: “Labor Demand Elasticities over the Life Cycle: Evidence from Spain’s Payroll Tax Reforms”. Our department “Labour Market” invited Mr Elias-Moreno to present his paper to our researchers.

Ferran Elias-Moreno sums up his publication in these words:

"This paper estimates the employment and wage effects of payroll tax credits at different moments of the life cycle. In 1997, Spain reduced payroll taxes for new hires younger than 30 and older than 45. Time variation and age discontinuities allow me to perform both a difference-in-difference analysis and a regression discontinuity design. Using administrative data, I find that employment at age 30 increased by 2.42%. Moreover, I show that the gains do not come at the expense of non-subsidized workers, indicating that the policy led to net job creation. Wages of new hires are not affected by the reform. In contrast, the tax cut at 45 had no effect on employment or wages. For prime-age workers, the lower payroll taxes can be interpreted as a transfer from taxpayers to firms. Combining the above estimates and standard tax incidence formulas, I obtain a lower bound labor demand elasticity of -0.63 at age 30 and zero for workers who are 45 years old. An analysis of wage densities and other observable characteristics supports the conjecture that the elasticity decreases with age because the quality of available workers decreases with age […]. A cost-benefit analysis shows that payroll tax receipts would increase if the tax rate for workers under 30 was reduced. The results at age 45 suggest low efficiency costs of payroll taxes for prime-age workers. Finally, I discuss implications for payroll tax reforms, welfare-to-work schemes, and job-search assistance."