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Labor Demand Response to Labor Supply Incentives: Lessons from the German Mini-Job Reform

Gabriela Galassi ()
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Gabriela Galassi: Bank of Canada

No 14248, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper analyzes how firms respond to changes in tax benefits for low-earning workers and how such policies also affect high-earning workers. I explore establishment outcomes around Germany's 2003 Mini-Job Reform, which expanded tax benefits for low-earning workers. I document that highly exposed establishments–high proportion of low-earning workers–increase their employees relative to non-exposed establishments–low proportion of such workers. This relative expansion is tilted towards high-earning workers, not targeted by the tax benefits. Nonexposed establishments substitute employment towards low-earning workers without expanding at the same pace. My findings are consistent with a model in which employment growth the policy intended is accompanied by a reallocation of employment and production between highly exposed firms and non-exposed firms, resulting in an efficiency loss.

Keywords: tax benefits; firm decisions; spillovers (search for similar items in EconPapers)
JEL-codes: E24 E64 H20 H24 H32 I38 J23 J38 (search for similar items in EconPapers)
Pages: 95 pages
Date: 2021-04
New Economics Papers: this item is included in nep-eur, nep-lma, nep-mac and nep-pbe
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