Labor Market Institutions and the Incidence of Payroll Taxation

Abstract

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Are payroll tax cuts absorbed by insiders? Evidence from the Swedish retail industry

“…Several earlier contributions have argued that payroll taxes are generally borne by workers and that a payroll tax cut will result in higher wages Gruber, 1997;Holmlund, 1983;Kim et al, 2021). Why, then, are insiders in the context of this study unable to realize more of the payroll tax cut into higher bargained wages?…”

“…Payroll taxes are generally considered to be shifted back to workers (Gruber, 1997;Holmlund, 1983;Kim et al, 2021), which implies that wages adapt to the tax change, while the effect on employment is considered to be small. Thus, insiders are assumed to use their bargaining power to increase their wages at the expense of outsiders' possibilities of becoming employed.…”

“…Why, then, are insiders in the context of this study unable to realize more of the payroll tax cut into higher bargained wages? Kim et al (2021) argue that payroll taxes are, to a large extent, shifted to workers in countries with competitive and flexible labor markets, as opposed to countries with centralized union wage bargaining, such as Sweden. In line with this finding, Saez et al (2019) argue that pay equity constraints may play a role in the Swedish context, as unions may prevent reduced labor costs from being shifted to insider wages.…”

“…One concern, however, is that payroll tax cuts might be absorbed by higher wages for insiders. This concern stems from earlier findings suggesting that payroll taxes are partly or entirely borne by workers (Gruber, 1997;Holmlund, 1983;Kim et al, 2021). Hence, firms' labor costs might be left unchanged following payroll tax cuts Korkeamäki & Uusitalo, 2009).…”

“…One frequent objection against payroll tax cuts is that changes to the payroll tax have been known to shift back to workers in the form of wage changes Gruber, 1997;Holmlund, 1983;Kim et al, 2021). Payroll tax cuts can thus be depleted by higher wages or various employment substitution effects among nontargeted workers (Fullerton & Metcalf, 2002).…”