Employment effects of payroll tax subsidies
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Employment effects of payroll tax subsidies Matthias Collischon & Kamila Cygan-Rehm & Regina T. Riphahn
Accepted: 11 March 2020 # The Author(s) 2020
Abstract This paper exploits several reforms of wage subsidies in the framework of the German Minijob program to investigate substitution and complementarity relationships between subsidized and non-subsidized labor demand. We apply an instrumental variables approach and use administrative data on German establishments for the period 1999–2014. Particularly in small establishments (0–9 employees), subsidized Minijob employment comprises large shares of the work force, on average over 40%. For these establishments, robust evidence shows that increasing the subsidization of Minijob employment crowds out non-subsidized employment. Our results imply that Minijob employment in 2014 may have eliminated more than 0.5 million unsubsidized employment relationships just in small establishments. This represents an unintended and harmful consequence of the Minijob subsidy. Keywords Wage subsidy . Minijob . Labor demand . Substitution effect . Crowding out effect . Displacement effect . Employment . Payroll tax JEL code J21 . J23 . J38 . C26 . L26
Arbeit) 2017). Introduced decades ago, the original purpose of the payroll tax subsidy was to reduce bureaucratic burden and to facilitate flexible minor employment relationships. At the same time, however, subsidized employment might crowd out demand for unsubsidized labor. With more than 7.4 million Minijob employment relationships (as of July 2017), their impact on unsubsidized employment could potentially be substantial. Even though subsidized employment relationships exist in many national labor markets, the relationship between subsidized and unsubsidized employment and the potential crowding out and displacement effects, surprisingly, have hardly been investigated, so far. This study exploits various reforms of subsidized employment to identify the causal effect of payroll tax subsidies on the demand for unsubsidized labor. Minijobs (geringfügige Beschäftigung) are employment relationships which yield less than a given amount of monthly earnings, currently 450 Euro; this corresponds to about 13% of gross average monthly earnings in unsubsidized employment.1 Small establishments and the retail, general service, and restaurant sector use Minijob employment most intensely. More than 60% of
1 Introduction 1
One in six German workers takes advantage of subsidized “Minijob” employment (BA (Bundesagentur für M. Collischon : K. Cygan-Rehm : R. T. Riphahn (*) Economics Department, Friedrich-Alexander-University Erlangen-Nürnberg, Lange Gasse 20, 90403, Nürnberg, Germany e-mail: [email protected]
STBA (2017, p.4) reports that gross average monthly earnings in unsubsidized full- and part-time employment amount to 3415 Euro as of March 2017. Minijobs additionally comprise short-term employment relationships (kurzfristige Beschäftigung), which do not extend beyond (currently) 70 days per year, independent of earnings. We disregard thi
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