Evaluation of payroll tax subsidies for low-wage workers

In this article, we study the impact of payroll tax subsidies for low-wage workers on various outcomes of the firms, including employment, in particular that of young and less skilled workers. We concentrate on the effects of the 1995 and 1996 tax cuts policies, which permit large decreases in employer-paid contributions compared with the 1993 original policy. To distinguish between firms that are more or less concerned by these reductions, we compute for each firm in 1994 the changes in total labor costs, which are solely due to the changes in the tax reductions between 1994 and 1997. This variable lies between 0 and 10%, depending on the proportion of low wage workers in the firm in 1994. This paper includes an important methodology part. It refers to the statistical framework of Rubin (1974, 1977, 1983) and Heckman, Ichimura and Todd (1997, 1998, 1999), appropriate for the evaluation of a unique treatment, like participation in a training program. For identifying the effects of the firms ex ante labor cost reduction, we adapt the formalism to the case where the economic policies involve an infinite number of possible treatments. We also propose an estimation method based on the implementation of nonparametric series estimators. The empirical analysis makes use of matched employer-employee information originating from two main sources of data, the Déclarations Annuelles de Données Sociales (DADS) and the Bénéfices réels normaux (BRN). We find that, between 1994 and 1997, tax reductions are associated with very strong employment and wages effects in the economy. We also find that they permit the creation or the save of roughly 400.000 works, even though this estimate is rather imprecise because of the methodology.