Can payroll tax cuts help firms during recessions?

Youssef Benzarti, Jarkko Harju

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper estimates the effect of payroll tax cuts on firm-level employment and balance-sheet outcomes during economic downturns. We use two regional payroll tax cuts in Finland as well as the onset of the Great Recession to estimate the effect of the recession on firms treated by the payroll tax cuts compared to a similar control group. When implemented, prior to the Great Recession, we estimate that the payroll tax cuts had limited effects on employment and balance-sheet outcomes of firms located in the treated regions. However, when the recession starts, some of its negative effects were substantially hampered by the previously enacted payroll tax cuts in treated firms. These employment effects are exacerbated for men and low-skilled employees. We also find that sales and profits in treated firms respond differently in treated firms during the recession. We provide some evidence showing that firms that are liquidity constrained are the ones that exhibit the strongest response. This shows that payroll tax cuts can make firms more resilient during downturns, possibly by relaxing liquidity constraints.

Original languageEnglish
Article number104472
JournalJournal of Public Economics
Volume200
DOIs
Publication statusPublished - Aug 2021
Publication typeA1 Journal article-refereed

Keywords

  • Employment
  • Firms
  • Fiscal multipliers
  • Great recession
  • Labor costs
  • Payroll taxes
  • Place-based policies
  • Wages

Publication forum classification

  • Publication forum level 2

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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