Equilibrium effects of tax exemptions for low pay

Luke Haywood and Michael Neumann

Labour Economics, 2021, vol. 69, issue C

Abstract: Across the world, tax exemptions for jobs with low earnings intend to incite non-participating workers to rejoin the labor market. However, such tax exemptions may also have negative equilibrium effects. The German minijob tax exemption offers a convenient case to identify equilibrium effects as it applies to some but not to other low-wage jobs. We build and estimate a structural job search model with discontinuous taxes on German administrative data. Counterfactual policy simulations highlight distributional consequences of reforming the tax exemption. We find that 1.99 million individuals only participate in the labor market due to the tax exemption. A budget-neutral removal of the tax subsidy hurts these workers (e.g. retirees, students), but benefits those who seek small jobs independently of the tax exemption. Furthermore, a removal would result in greater variance in equilibrium wages, benefiting workers who search more (those without another job) at the cost of workers searching less (e.g. those seeking a second job).

Keywords: Tax exemptions; Income taxes; Social security contributions; Labor demand; Job search; Firm responses (search for similar items in EconPapers)
JEL-codes: J22 J23 J31 J64 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: The Role of Aggregate Preferences for Labor Supply: Evidence from Low-Paid Employment (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:labeco:v:69:y:2021:i:c:s0927537121000117

DOI: 10.1016/j.labeco.2021.101976

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