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Phasing Out Payroll Tax Subsidies

Author

Listed:
  • Anna Herget
  • Regina T. Riphahn

Abstract

Many countries subsidize low-income employments or small jobs. These subsidies and their phasing out can generate labor market frictions and distort incentives. The German Minijob program subsidizes low-income jobs. It generates a 'Minijob trap' with substantial bunching along the earnings distribution. Since 2003, the newly introduced Midijob subsidy aims to reduce the Minijob-induced notch in the net earnings distribution. Midijobs reduce payroll taxes for employments above the Minijob earnings ceiling. We investigate whether introducing Midijobs reduced the Minijob trap. We apply a regression discontinuity design using administrative data and a difference-in-differences estimation using survey data. While in both cases our results show a small positive overall effect of Midijobs on transitions out of Minijobs, they are effective only for a narrow treatment group.

Suggested Citation

  • Anna Herget & Regina T. Riphahn, 2024. "Phasing Out Payroll Tax Subsidies," CESifo Working Paper Series 11605, CESifo.
    • Handle: RePEc:ces:ceswps:_11605
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    More about this item

    Keywords

    Midijobs; Minijobs; payroll tax subsidy; causal effects; difference-in-differences; regression discontinuity; SOEP; SIAB;
    All these keywords.

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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