Equilibrium effects of payroll tax reductions and optimal policy design

Thomas Breda, Luke Haywood and Haomin Wang
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Thomas Breda: PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Ecole Normale Supérieure - UMNG - Université Marien-Ngouabi [Université de Brazzaville] = Marien Ngouabi University [University of Brazzaville], PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Luke Haywood: MCC - Mercator Research Institute on Global Commons and Climate Change - PIK - Potsdam Institute for Climate Impact Research, Leibniz Association
Haomin Wang: Cardiff Business School - Cardiff University

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Abstract: We quantify the unintended effects of a low-wage payroll tax reduction using an equilibrium search model featuring bargaining, worker and firm productivity heterogeneity, labor taxes, and a minimum wage. The decentralized economy is inefficient due to search externalities and labor market policies. We estimate the model using French data and find that a significant reduction in low-wage payroll taxes in 1995 leads to an overall improvement in economic efficiency by increasing employment and correcting existing policy distortions that disincentivize labor force participation. However, the tax reduction, by increasing labor force participation among low-productivity workers and vacancy postings by low-productivity firms, results in negative but minor spillover and reallocation effects due to congestion. We find that the optimal policy mix is a lower minimum wage and lower payroll taxes compared to the policies in place in the early 1990s.

Keywords: Payroll tax; Minimum wage; Equilibrium job search; Worker and firm heterogeneity (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
Note: View the original document on HAL open archive server: https://cnrs.hal.science/hal-04873024v1
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Citations: View citations in EconPapers (1)

Published in Labour Economics, 2024, 91, pp.102646. ⟨10.1016/j.labeco.2024.102646⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04873024

DOI: 10.1016/j.labeco.2024.102646

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