Labor Costs and Firm Behavior – Evidence from Payroll Tax Rate Variation

This paper estimates the effects of payroll taxes on workers and firms. Using temporary and long-lasting payroll tax cuts across different municipalities in Finland and rich firm-level data, we find that payroll taxes affect wages at larger firms but not at medium-sized and smaller firms. These large firms also experience an increase in turnover and profits, which persists several years after the payroll tax cuts are repealed. This suggests that the efficiency cost of payroll taxes can be substantial and temporary payroll tax cuts can be desirable to stimulate the economy during downturns.