DPP Research Seminar: 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 also examine the heterogeneous impact of the policy by firm quality. 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, we find a significant increase in wages 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.