Evaluation of the effects due to swedish temporarily reduced payroll tax
The purpose of this report is to evaluate the effects of the temporarily reduced payroll tax on firms’ wage payments and number of employees.
In March 2020, the Swedish government launched a financial aid package that reduced the payroll tax level, resulting in reduced labor costs for firms. To help firms overcome a temporary loss in revenues and to avoid layoffs, the payroll tax was temporarily reduced from 31.42 to 10.21 percent during the four-month period of March 1 – June 30 (Prop. 2019/20: 151). The reduction was limited to a maximum of 25 000 SEK of monthly wages and 30 employees, meaning that it was designed to primarily benefit smaller firms.
The report utilizes detailed monthly data on Swedish firms, making it possible to evaluate firms’ development both before and after the financial aid package was implemented. Using a Difference-in-Differences model, the report compares the outcomes in terms of wage payments and number of employees between firms that received large and small labor cost reductions, respectively. Estimations are made separately for firms with at least two employees and firms with 25-35 employees. The main findings of this report are:
Monthly estimates for year 2020 indicate that the temporarily reduced payroll tax hadpositive effects on firms’ wage payments during both the months under which thereduction was in effect and in the succeeding months, suggesting that the financialaid package had positive effects after its abolishment. This estimated effect is almostexclusively explained by the firms that received the largest labor cost reductions. Forfirms with 25-35 employees, no statistically significant estimates regarding wagepayments are observed. The findings regarding the number of employees typicallysuggest a persistent and negative relationship between the reduced payroll tax andfirms’ number of employees.
Industry-level analyses conducted on a sample of industries suggest that the reducedpayroll tax has in particular benefitted firms within the hotel and restaurant sector,with positive and persistent effects on both wage payments and number ofemployees. Estimations for the retail, construction and manufacturing industries doalso suggest positive effects on wage payments, but these estimates are smaller inmagnitude compared to the hotel and restaurant sector. For the transportation sector,we cannot find any evidence that the temporarily reduced payroll tax has improvedthe outcomes of firms.
The estimates suggesting a negative relationship between the financial aid packageand the firms’ number of employees appear to be explained by the fact that firmswith large reductions in their labor costs primarily decreased the number ofemployees with low monthly wages, e.g., hourly employed. This negativerelationship is not as prevalent when limiting the analysis to employees who havemonthly wages corresponding to at least two income base amounts (approx. 11 000SEK per month).
In summary, the findings suggest that the temporarily reduced payroll tax has had a positive effect on the average wage payments among some firms. However, the effects of this financial aid package vary with firm size and also considerably between industries.
The results regarding the effect on firms’ number of employees indicate that, in general,there is a negative relationship between the temporary payroll tax reduction and the number of employees. This negative relationship appears to be primarily explained by a decreased number of low-wage employees. This could, in turn, potentially be explained by the fact that firms that received large labor cost reductions had a larger share of lowwage workers to begin with. If so, the negative relationship between firms’ employment and the relative size of the tax cut is not an effect of the financial aid package, i.e., of the tax cut per se.
By relating the estimated average increase in wage payments to the firms’ aggregated wage sum, we evaluate the economic significance of the financial aid package. The calculation suggests that the financial aid package resulted in an increase in the firms’ total wage payments by almost one billion SEK during 2020, which is considerably less than the 28 billion SEK in government revenue loss that the payroll tax reduction was expected to bring. Even though it cannot be ruled out that the total effect of the payroll tax reduction on the aggregated wage sum might have exceeded one billion SEK, our results strongly suggest that the financial aid package had modest effects on firms’ wage payments compared to its generated loss in government revenue.