Firm heterogeneity and the impact of payroll taxes

We study the impact of a large payroll tax cut for both younger and older workers in Hungary. Motivated by the prediction of standard equilibrium job search models, we examine the heterogeneous impact of the policy. Employment increases most at low-productivity firms, which tend to hire from unemployment, while the effects are more muted for high-productivity firms, especially for older workers. At the same time, wages only increase for older workers at high-productivity firms. These results point to important heterogeneity in the incidence of payroll tax subsidies by firm type and highlight that payroll taxes can change the composition of jobs in the labor market. ∗B́ıró: Centre for Economic and Regional Studies (biro.aniko@krtk.hu). Branyiczki: Central European University and Tárki (branyiczki reka@phd.ceu.edu). Lindner: University College London (a.lindner@ucl.ac.uk). Márk: Central European University (mark lili@phd.ceu.edu). Prinz: Institute for Fiscal Studies (daniel.prinz@ifs.org.uk). We thank János Köllő, David Leite, Claire Leroy, David Phillips, Balázs Reizer, Jesse Rothstein, Johannes Spinnewijn, Lajos Szabó, Dario Tortarolo and seminar participants at Georgetown University, Ben-Gurion University, the Institute for Fiscal Studies, the Hungarian Economic Association Annual Conference, the Paris-London Public Economics Virtual Conference, the ZEW Public Finance Conference, the University of Chile, the Virtual Mannheim-Bonn CRC TR 224 Workshop on Labor Markets, the Federal Reserve Bank of Dallas, the Hungarian Institute of Economics Summer Workshop, the Annual Mannheim Taxation Conference, the Annual European Association of Labour Economists Conference, the University of Barcelona, IZA, the Nova School of Business and Economics, the Munich Center for the Economics of Aging, the Hungarian Labor Economics Conference, the University of Oxford, CEU Economics, Corvinus University of Budapest, the National Tax Association Annual Conference, the University of Copenhagen, the London School of Economics, the ASSA Annual Meeting, CEU Public Policy, the Stockholm School of Economics, the Centre for Economic and Regional Studies, the Royal Economic Society Annual Conference, and CEU CESS for helpful comments. Ágoston Reguly provided excellent research assistance. B́ıró, Branyiczki and Márk were supported by the “Lendület” program of the Hungarian Academy of Sciences (grant number: LP2018-2/2018). Lindner and Prinz were supported by the ESRC Centre for the Microeconomic Analysis of Public Policy (grant number: ES/T014334/1). Lindner also acknowledges financial support from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant agreement number: 949995) and from the Economic and Social Research Council (new investigator grant, ES/T008474/1). The administrative database used in this paper is a property of the National Health Insurance Fund Administration, the Central Administration of National Pension Insurance, the National Tax and Customs Administration, the National Employment Service, and the Educational Authority of Hungary. The data was processed by the Databank of the Centre for Economic and Regional Studies.