Abstract
Firms within the service industries are of special interest when researching the effects of payroll tax reforms directed toward young employees. This is so because service industry firms often have a large share of young employees, and since labor demand in these firms is likely to be elastic. As such, the service industry should be more prone to respond to changes in payroll taxes than other industries. We investigate the impact of a payroll tax reform in Sweden that decreased firms’ labor costs in relation to the number of young employees that they had employed when the reform was implemented in 2007. This study addresses a significant gap in the existing literature by analyzing both employment on the extensive margin (new jobs) and the intensive margin (work hours by incumbent workers). While our results show increases in extensive margin employment of similar magnitude as previous studies, we also find that the reform had substantial intensive margin effects. The findings suggest that previous research has underestimated the impact of the 2007 Swedish payroll tax reform on employment, and that studies of similar reforms that disregard intensive margin effects risk underestimating the impact of such reforms.
