The Employment Effects of Low-Wage Subsidies

Transcription

1 The Employment Effects of Low-Wage Subsdes Krstna Huttunen Jukka Prttlä Roope Uustalo CESIFO WORKING PAPER NO CATEGORY 4: LABOUR MARKETS MAY 2010 An electronc verson of the paper may be downloaded from the SSRN webste: from the RePEc webste: from the CESfo webste: Twww.CESfo-group.org/wpT

2 CESfo Workng Paper No The Employment Effects of Low-Wage Subsdes Abstract Low-wage subsdes are often proposed as a soluton to the unemployment problem among the low sklled. Yet the emprcal evdence on the effects of low-wage subsdes s surprsngly scarce. Ths paper examnes the employment effects of a Fnnsh payroll tax subsdy scheme, whch s targeted at the employers of older, full-tme, low-wage workers. The system s clear elgblty crtera open up an opportunty for a relable estmaton of the causal mpacts of the subsdy, usng a dfference-n-dfference-n-dfferences approach. Our results ndcate that the subsdy system had no effects on the employment rate. However, t appears to have ncreased the probablty of part-tme workers obtanng full-tme employment. JEL-Code: H24, J23, J68. Keywords: low-wage subsdes, employment, socal securty contrbutons. Krstna Huttunen Labour Insttute for Economc Research krstna.huttunen@labour.f Jukka Prttlä Department of Economcs Unversty of Tampere, Fnland jukka.prttla@uta.f Roope Uustalo Government Insttute for Economc Research roope.uustalo@vatt.f We are grateful to Matz Dahlberg, Tom Kyyrä and semnar partcpants at MIT, the Athens Unversty of Economcs and Busness, the Helsnk Centre for Economc Research, the CESfo Area Conference on Labour Economcs, the Unversty of Jyväskylä, and the 2009 EALE Conference (Amsterdam), the Nordc Summer Insttute n Labour Economcs (Aarhus), and the Nordc Semnar for Publc Economcs (Uppsala, Sweden) for useful comments. Kar Eerola provded excellent research assstance and Oss Korkeamäk helped wth calculatons nvolvng the FLEED data. Fnancal support from the Fnnsh Employees Foundaton s gratefully acknowledged.

3 1. Introducton One way to reduce unemployment among the low sklled s to cut labour taxaton for lowncome workers. The basc dea n targeted tax cut s that t decreases the cost of employng the target-group workers, and thus ncreases wages and employment of ths group. In theory t should not matter whether tax cuts are provded as a wage subsdy to the employers or as an equvalent ncome tax reducton to the workers. However, n practce, the wage subsdy gven to the employers of low-sklled workers can be more effectve n ncreasng the demand for those workers than a reducton n the taxes pad by the employees. 1 The reason s that f wages are rgd downwards, the subsdy reduces labour costs and therefore ncreases labour demand more than a reducton n the labour ncome tax pad by the employees themselves. Despte the large agreement n the theoretcal lterature that these subsdes should be effectve, there s relatvely lttle emprcal research that has examned the effectveness of the (employer-sde) wage subsdes. Ths s n a marked contrast to a large lterature that has examned the effects of the targeted tax cuts for employees. 2 3 One reason for the lack of research s that low-wage subsdes, n the form of targeted cuts to employers socal securty contrbutons, have not been mplemented n practce n many countres. The purpose of ths paper s to offer new evdence on the causal effects of low-wage subsdes by examnng the mpacts of a hghly targeted low-wage subsdy experment that started n Fnland n The desgn of the Fnnsh low-wage subsdy scheme makes evaluatng ts mpacts relatvely straghtforward. In order to be elgble for the subsdy, the workers must be over 54 years of age, earn a salary between 900 and 2,000 euros per month and work full tme. Ths means that we can fnd several comparson groups for the targeted workers, thus allowng a dfference-n-dfference-n-dfferences (DDD) approach. We can smultaneously control for any permanent dfferences across the elgble and nelgble groups and take nto account tme-varyng dfferences n labour demand for dfferent skll groups. The latter, partcularly, may be qute mportant f skll-based techncal change or globalsaton changes the relatve productvty of dfferent workers. 1 See Phelps (1994, 1997) and Dreze and Malnvaud (1994) 2 See Essa and Lebman (1996) and Essa and Hoynes (2004) who examne the effects of the Earned Income Tax Credt n the US case and Blundell et al for the UK evdence on the effectveness of Workng Famles Tax Credt (WFTC) or Card and Hyslop (2005) for expermental evdence on effectveness of Self Suffency Project. Kramarz and Phlppon (2001) and Crepon and Desplatz (2003) evaluate the French low-wage subsdy system. All ths lterature s dscussed n more detal n Secton 2. 3 There s also large lterature whch focused on hrng subsdes that are drected to unemployed workers. 1

4 The emprcal analyss n the paper has many phases and utlses several dfferent data sets. We begn by lookng at the overall mpacts of the subsdy system on the employment rates usng data from the Fnnsh Labour Force Survey. In the followng part we use regster data of the unemployed and examne n detal whether the subsdy system ncreased re-employment rates of the unemployed. In the last part we use data that cover all workers n frms that are members of the Fnnsh Employers Confederaton. The beneft of these data s that they contan detaled nformaton about the workng hours and monthly wages of the workers that determne elgblty for the subsdy. Ths enables us to buld a clearly defned treatment group and correspondng control. We examne the mpacts of the subsdy system on the job leavng rate, as well as workng hours and wages of those workers who keep ther jobs. Ths paper contrbutes to the lterature n many ways. Frst, as mentoned already, the clear elgblty crtera of the Fnnsh low-wage subsdy experment makes t possble to examne the effects of a low-wage subsdy on target-group employment, whle controllng for the smultaneous changes that affect the demand for all low-wage worker or all older workers. Second, ths paper adds to the relatvely scarce lterature that has examned the effects of lowwage subsdes on employment and t s the frst that uses data from a Nordc country. Fnland s a good case for analysng the effectveness of payroll tax subsdes. Unon contracts have led to a relatvely narrow wage dstrbuton whch could have contrbuted to the gap n the unemployment rates between low-sklled and hgh-sklled workers that s among the largest n Europe, accordng to the Eurostat Labour Force Survey. Fnally, snce the subsdy scheme was targeted to older workers, our results also provde new evdence on the effectveness of polces that am to ncrease the demand for older workers. The paper proceeds as follows. Secton 2 revews earler relevant emprcal work. 4 Secton 3 explans the Fnnsh subsdy system n more detal. In secton 4 we look at the trends n the employment rates of workers n dfferent age groups usng data from the Fnnsh Labour Force Survey. In secton 5, we use regster-data of the unemployed and examne n detal whether the subsdy system affected re-employment rates of unemployed. In Secton 6 we examne the mpacts of the subsdy system on the job leavng rate, as well as workng hours and wages of those workers who keep ther jobs usng data of the Fnnsh Employers Confederaton. Fnally, secton 7 dscusses results from a number of extensons to the analyss above. Secton 8 concludes. 4 For the sake of space, we do not cover the theoretcal lterature on payroll tax subsdes here. Brown et al. (2007) contans an extensve lst of theoretcal work n the area. 2

5 2. Earler emprcal work The best-known scheme amng at promotng low-wage employment wth subsdes to employers was mplemented n France, where payroll taxes were reduced for the low-wage workers several tmes n md 1990 s. The man dfference between the Fnnsh and the French subsdy schemes s that the French subsdy affects all low-wage workers, whle the Fnnsh subsdy s targeted at older low-wage workers. The evaluaton of French scheme s thus more dffcult, snce t s hard to dstngush between the employment effects that are due to the subsdy from the smultaneous changes affectng all low-wage workers 5. Employment effects of the French payroll tax subsdy scheme have been evaluated by Kramarz and Phlppon (2001) and Crepon and Desplatz (2003). Kramarz and Phlppon base ther evaluaton on household survey data and examne the effects of changes n the mnmum labour costs - hence capturng the effects of both the changes n mnmum wage and the changes n payroll tax subsdes at the mnmum wage level. By comparng workers affected by the mnmum wage ncreases wth workers just above the new mnmum wage, they show that ncreases n labour costs ncrease transtons to non-employment. However, ther analyss regardng the effects of a decrease n the labour costs due to an ncrease n the payroll tax subsdy reveals no sgnfcant employment effects. The authors measure ths as an ncrease n mnmum-wage workers comng from non-employment. Crepon and Desplatz (2003) perform ther analyss wth frm-level employment as the key dependent varable. They calculate the ex-ante change n labour costs due to the payroll tax subsdes, usng payroll tax parameters and the composton of the frm s labour force before the ntroducton of the payroll tax changes. They fnd that employment n frms that receved larger subsdes grew more than employment n frms that employed fewer low-wage workers and hence receved fewer subsdes. The authors nterpret ths as strong evdence for the employment effects of low-wage subsdes. Snce the outcome varable s total employment, the authors cannot dscover whether the ncrease n employment occurs n the targeted lowwage group or whether the ncrease n employment s due to an ncrease n hgh-wage workers. 5 The Fnnsh and French subsdy systems are roughly smlar n magntude, but the Fnnsh subsdy s phased out more slowly and hence has an mpact on labour costs at much hgher wage levels. 3

6 Targeted payroll tax subsdes have also exsted n the Netherlands and n Belgum. Goos and Konngs (2007) evaluate the effects of changes occurrng n the Marbel subsdes system n Belgum n the late 1990s usng frm-level data. These subsdes reduced the payroll taxes pad on manual workers. Even though the subsdy was not specfcally targeted to the employers of low-wage workers, ts lump-sum structure reduced the payroll taxes for the lowwage workers more than for the other groups. Goos and Konngs fnd that the subsdy had sgnfcant effects on employment 6. The subsdes dscussed above nvolve a decrease n the payroll taxes of the subsdzed workers. Gruber (1994) analyses the effect of a reverse experment, ncreasng the costs of hrng certan groups by ncreasng mandatory employer contrbutons. He examnes the effects of forcng employers to purchase health nsurance that ncludes maternty benefts, a change manly affectng young women. He shows that the costs of these group-specfc mandates are manly borne by workers n terms of lower wages and that the addtonal costs have lttle effects on employment. Whle permanent non-categorcal subsdes to all employers of the low-wage workers are rather rare, there s a large lterature evaluatng the effects of temporary subsdes to employers who hre long-term unemployed persons or workers wth dsabltes. Many of these programs have been evaluated usng randomsed trals. In hs comprehensve survey of the US programs Katz (1996) concludes that wage subsdes have been effectve n mprovng the earnngs and employment of dsadvantaged groups, at least when combned wth tranng elements. More recent evdence s avalable from Brtan, where the so-called New Deal system has led to modest mprovements n the productvty of the target group (e.g. Blundell et al. 2004). 7 8 As dscussed n the ntroducton, an alternatve to employer-based subsdes s to target the subsdy to employees. Ths s the way n whch the Earned Income Tax Credt n the US and the Workng Famles Tax Credt n the UK are desgned. There exts a large lterature that 6 We are not aware of the econometrc evaluatons of the Dutch system, but Bovenberg et al. (2000) evaluate ts effects usng a smulaton model calbrated to Dutch data. Ther concluson s that the most effectve way of reducng unemployment s the ntroducton of n-work benefts, though the smulaton results between the benefts pad to the low-wage workers or to the employers of these workers are roughly smlar. 7 See also Gesne (2009) that focuses on the wage effects of hrng subsdes. Hs paper also ncludes an extensve survey of the emprcal work on hrng subsdes. 8 There s also lterature on the effects of payroll tax reductons that affected all employees (Gruber, 1997), or all employees n some regons (Korkeamäk and Uustalo, 2009 and Bennmarker et al., 2009). 4

7 examnes the effectveness of employee-base subsdes. Despte the dfferent nomnal recpents, there are also smlartes that make the results from the evaluaton of these subsdy schemes relevant for the Fnnsh case. All these schemes share the property that the subsdy s targeted to the low-wage workers and that the subsdy gradually decreases after earnngs ncrease above some threshold level. They are also ntended to be permanent subsdes for the low-wage workers nstead of temporary subsdes for the newly hred. Importantly for the evaluaton, these schemes also have other elgblty crtera n addton to low earnngs. Ths allows comparng wage and employment changes after the ntroducton or expanson of the subsdy n the elgble group and n some comparson group that s n a reasonably smlar poston n the labour market. Usng ths strategy, Essa and Lebman (1996) and Blundell (2006) compare the changes n labour supply between sngle mothers and (nelgble) sngle women wthout chldren. Both of these studes fnd substantal effects on the labour supply The Fnnsh employer low-wage subsdy scheme Snce January 1 st 2006 Fnnsh employers have been elgble for a wage subsdy f they employ a low-wage worker that s over 54 years old. The subsdy-scheme s temporary and wll be n force untl December The subsdy depends on the wage level and may be up to 16 per cent of the gross wage or 13 per cent of the total pre-reform labour costs ncludng payroll taxes. The subsdy covers full-tme workers who are employed at least 140 hours per month and whose wage s between 900 and 2,000 euros per month. The subsdy equals 44 per cent of the part of the monthly wages that exceeds 900 euros. The maxmum subsdy per employee s 220 euros a month. The amount of the subsdy s reduced by 55 per cent of the monthly wages exceedng 1,600 euros. The wage subsdy s pad to the employer and can be seen as smply a reducton n the payroll tax rate for the frms that employ old low-wage workers. In 2006 the average payroll tax rate 9 Card and Hyslop (2005) provde expermental evdence on the effectveness employee-based wage subsdes. They evaluate Canadan Self-Suffcency Project, whch gave randomly chosen welfare recpents a subsdy for full-tme work for 3 years. The results ndcate that the subsdy had a clear negatve- although temporary- effect on welfare partcpaton. 10 Whether the system wll be contnued wll depend on ts effectveness durng the expermental perod. Snce the experment wll be qute long, t s reasonable to beleve that frms can react to t and therefore the evaluaton of ths system wll also reveal relevant nformaton for a truly permanent scheme. 5

8 was 20.9 per cent of the gross wage. The tax s leved on all wages. The revenues are manly used for fundng the employee s penson system and the sckness nsurance. The tax rate s slghtly hgher for larger and more captal-ntensve frms. For large frms, penson payments also vary accordng to the age structure of the employees and accordng to the dsablty and unemployment pensons granted to former employees. Stll, even for large frms the payroll tax s a proportonal tax on all wages pad. The 2006 tax subsdy created a system where the payroll tax rate s a decreasng functon of monthly wages when wages are between 900 and 1,400 euros. The payroll-tax rate s at ts mnmum (5.2%) when the monthly wage equals 1,400. When wages are between 1,400 and 1,600 euros, frms get the maxmum subsdy of 220 euros. The subsdy s gradually reduced when wages ncrease above 1,600 euros so that the subsdy reaches zero when the monthly wage equals 2,000 euros. In ths phase-out range the payroll taxes are strongly progressve wth tax rates ncreasng from 7.2 % at the wage level of 1,600 /month to roughly 21% at the wage level of 2,000 /month. Fgure 1 llustrates the effects of the low-wage subsdy by plottng the reducton n the payroll tax due to the system and the correspondng average payroll tax rate. Fnland has no mnmum wage laws. However, unon contracts also cover non-unon workers so that n practce the lowest legal wages are set n the unon contracts for about 95 per cent of the workers. In the unon contracts, the lowest wages vary across sectors, regons and tasks. In typcal low-wage sector contracts, the lowest full-tme wages were around 1,300 n In comparson one could note that accordng to Statstcs Fnland the average wage for full-tme workers was around 2,500 euros n The subsdy s therefore targeted at workers that are well below the average wage, wth the maxmum subsdy pad to those whose wage s close to the mnmum wage. 6

9 Fgure 1: The Fnnsh low-wage subsdy system. 25,00 % ,00 % ,00 % 10,00 % 5,00 % 0,00 % Tax rate, % EUR 50 0 Payroll tax rate Payroll tax reducton Notes: The payroll tax reducton due to the Fnnsh low-wage subsdy system (rght axs) and the correspondng average payroll tax rate (left axs), when the payroll tax wthout a subsdy s a proportonal 21% tax. Snce most full-tme workers earn more than 1,400 /month, the subsdy both lowered the average payroll tax rate of target group workers, and made the payroll tax more progressve. The effects of progressvty on wages and employment crucally depend on whether the labour market s compettve or not. In compettve labour markets, an ncrease n progressvty typcally reduces labour supply, whereas n an mperfect labour market, the opposte may hold. For example, n unon models, a revenue-neutral ncrease n tax progressvty can ncrease employment, snce t renders nomnal wage ncreases less proftable for the unons, tltng the balance between employment and hgh wages n favour of ncreased employment (see e.g. Lockwood and Mannng 1993, Holmlund and Kolm 1995 and Koskela and Vlmunen 1996). Ths s a relatvely robust result that has garnered some emprcal support, and t also holds under dfferent labour-market mperfectons (see e.g. the dscusson n Sørensen 1997). 7

10 However, the mrror mage of ths result s that gross wages for low-pad workers may rse less than they would have rsen n the absence of the progressve payroll tax system. 11 Second, even f a rse n tax progressvty may ncrease employment at the extensve margn (.e. the number of employees), t can stll reduce the hours of work or, more generally, effort by ndvdual workers at the ntensve margn. 12 Therefore, t s also mportant to account for how the hours that are worked change because of the reform. 4. Employment rates by age As a frst attempt to assess the employment effects of the wage subsdes we use data from the Fnnsh Labour Force Survey. We do not have mcro-data at our dsposal but we used employment rates and average hours per employed worker both calculated for one-year age groups. These data are unpublshed tables produced for nternal use at Statstcs Fnland. Statstcal publcatons report smlar numbers aggregated to fve-year age groups. We use data on employment rates and hours per employee for one-year age-groups between ages 46 and 60 from the perod and specfy a smple dfference-n-dfferences model that captures dfferences n employment rates across age groups and general trends n the labour markets. The effect of the subsdy scheme s captured by an nteracton term, SUBSIDY t, ndcatng that the subsdy system has been mplemented (year 2006) and that the age-group s elgble for the subsdy (age 54). The equaton to be estmated s therefore y = + SUBSIDY + D(age )+ D(year )+, (1) t t t t t where y t s the varable of nterest.e. the employment rate or average hours of age group n year t. The coeffcent s an unbased estmate of elgblty for the subsdy f there are no other age-specfc trends that are correlated wth the subsdy scheme. As can be seen from Fgure 2 ths assumpton s lkely to be volated. Employment rates for the older age groups had been ncreasng for several years before the ntroducton of wage subsdes for reasons clearly unrelated to the subsdy scheme. To avod nterpretng these changes as an effect of 11 Ths s, n fact, what some unons, where a large proporton of members are n the low-wage area, feared and therefore they opposed the ntroducton of the low-wage subsdy system. 12 Ths pont had already been examned by Jackman and Layard (1990). In the long term, tax progressvty can also reduce the ncentves to acqure educaton. 8

11 wage subsdes for workers over 54, we add age-specfc lnear trends to the equatons that we estmate. Fgure 2. Employment rates of selected age-groups n % 80 % 70 % 60 % 50 % 40 % % The results are dsplayed n Table 1. We frst report the effect of the subsdy on employment rates and then hours and per employee. The frst two columns nclude both men and women. The next columns report the results for men and women separately. All equatons nclude a full set of age and year dummes; coeffcents of these dummy-varables are not reported n the table. The estmates are reported n Columns 1, 3, and 5 ndcate that the dfference n the employment rates before and after the ntroducton of the subsdy system s on average 2.8 percentage ponts hgher n the age groups elgble for the subsdy than n the younger age groups. Also, hours per employed worker seem to have ncreased by 21.9 hours per year or by about 1.4 percent. However, both these changes seem to be due to a general ncrease n employment n the older age groups. After addng cohort-specfc trends to the equatons the estmated effects decrease close to zero and are not sgnfcant n any specfcaton. If the employment rates of the older age groups had ncreased after the reform we should have been able to detect them by usng data from the Labour Force Survey. Focusng on the employment rates nstead of the number of employed workers also captures the changes n the cohort sze effectvely controllng for the changes n the labour supply. The drawback to the 9

12 Labour Force Survey s that nformaton on wages or educaton s not avalable. Hence, we could not capture dfferental changes n low-wage and hgh-wage employment. Ths s why we now proceed to trple dfferences (DDD) analyss, frst n Secton 5, on ext from unemployment usng regster-data of the unemployed and, second n Secton 6, on job leavng rates, hours of work and wage rates usng data from the employers organsaton. Table 1. Dfference-n-dfferences estmates on employment rates. Employment rate All Men Women Subsdy 0.028*** ** *** (0.008) (0.010) (0.010) (0.014) (0.009) (0.011) Year effects yes yes yes yes yes yes Age effects yes yes yes yes yes yes Age-specfc trends yes yes yes N Adj R Standard errors n parentheses, * p<.1; ** p<.05; *** p<.01 Hours All Men Women Subsdy 21.9** (14.1) (21.7) (22.1) (35.6) (15.1) (24.4) Year effects yes yes Yes yes yes yes Age effects yes yes Yes yes yes yes Age-specfc trends yes yes yes N Adj R Standard errors n parentheses, * p<.1; ** p<.05; *** p<.01 Log hours All Men Women Subsdy (0.009) (0.013) (0.013) (0.020) (0.010) (0.016) Year effects yes yes yes yes yes yes Age effects yes yes yes yes yes yes Age-specfc trends yes yes yes N Adj R Standard errors n parentheses, * p<.1; ** p<.05; *** p<.01 10

13 5. Entry of the unemployed to the workforce We analyse the effect of the subsdy on re-employment rates usng ndvdual-level data from Fnnsh Longtudnal Census fles. The data contans a 33% random sample of populaton that resded n Fnland at some pont between 1990 and 2006 and hence also a random sample of the unemployed at any gven pont n tme. We take three separate cross-sectons of data contanng those who were unemployed n the last week of the years 2003, 2004 and 2005 and examne ther employment status n the end of the followng year. To focus on the elderly unemployed we lmt the data to those between the ages of 45 and 59 at the tme when we draw the samples.e between 46 and 60 when we measure ther labor market outcomes. The unemployed n the frst two cross-sectons are not elgble for the subsdy but those who were unemployed n the end of 2005 become elgble from the begnnng of 2006 f they are over 54 years old n We defne the treatment group as those who are elgble for the subsdy,.e. those whose monthly wages are less than 2,000 EUR and who are over 54 years old. Snce wages for the unemployed are not avalable, we cannot create treatment and control groups based on the current wage level. As a partal soluton we splt the data by educaton nto those wth no more than basc educaton and those wth at least a secondary educaton; and by prevous wage nto those whose pre-unemployment monthly wage was below 2,000 EUR and those whose pre-unemployment wage was hgher than that. Pre-unemployment wages are based on months worked and annual ncome receved durng the prevous year. To avod excessve measurement errors we only ncluded data on those who had worked at least sx months durng the calendar year. Snce many unemployed workers have ncomplete earnngs hstores we could calculate relable pre-unemployment wages for only about half of the sample. We have thus two alternatve treatment groups n ths secton: The year-old workers whose pre-employment monthly wages were below 2,000 EUR or the year-old workers who have no more than basc educaton. Workers who are younger than 54 or whose preemployment monthly wages were above 2,000 EUR (or who have more than basc educaton) are used as control group. We begn by estmatng the effect of low wage subsdy on re-employment rates of unemployed workers. The estmated equaton has the followng form: 11

14 P(Et = 1 Et 1 = 0)= + 1X t + 2YEAR+ t 3 AGEG+ 4WAGEG, t 1 + 5(AGEG WAGEG, t + (YEAR AGEG)+ (YEAR WAGEG )+ (YEAR AGEG WAGEG ) 6 t 7 t, t 1 8 t, t 1 1 ) (2) In ths equaton ndexes ndvduals, t ndexes years and P(Et = 1 Et 1 = 0 ) s the probablty that an unemployed worker fnds employment between t-1 and t. X t s a vector of ndvdual characterstcs, YEAR controls for common tme shocks, AGEG s an age group dummy, whch controls for permanent dfferences between older and younger workers, WAGEG s a wage group dummy (based on prevous earnngs or educaton level), whch controls for permanent dfferences between low-wage (low-skll) and hgh-wage (hgh-skll) workers, AGEG*WAGEG controls for tme-nvarant characterstcs of the treatment group, YEAR*AGEG controls for the tme-specfc shocks that affect the outcome of older workers, and YEAR*WAGEG captures the tme-specfc shocks common to low-wage (or low-skll) workers. The thrd level nteracton term ( 8 ) captures all varatons n the outcome specfc to older low-wage (or low-sklled) workers after the ntroducton of the low-wage subsdy scheme. Ths s the dfference-n-dfference-n-dfferences (DDD) estmator. Its dentfyng assumpton s that there s no contemporaneous shock that affects the relatve outcomes of the treatment group dfferently than other older workers or other low-wage (low-skll) workers. Table 2 presents the man results of the exercse. Frst, n Column 1 we presents dfference-ndfference-n-dfferences estmates.e. the coeffcent of a trple nteracton between the postreform perod, age over 54 and only compulsory educaton whle controllng for the par-wse nteractons between these varables. The coeffcent s postve, ndcatng that the reemployment rates of the unemployed that are more lkely to be elgble for the subsdy ncrease by one per cent due to the reform. However, ths estmate s not statstcally sgnfcant. In the second column we use an ndcator of prevous wages that are below 2,000 euro nstead of an ndcator of low educaton. Snce data on prevous wages s mssng for many observatons the sample sze s dramatcally reduced. The estmate s larger than n the prevous column but stll nsgnfcantly dfferent from zero. In Column 3 we lmt the comparson group to those whose prevous monthly wage s below 3,000 euro and n Column 4 exclude the unemployed who are 55 because ther early retrement benefts changed n 2005 n a way that s lkely to ncrease re-employment ncentves. Nether has much effect on the estmates An earler decded penson reform came nto force durng the same tme, affectng the early retrement ncentves of all 55 year olds (not only low-ncome older workers). 12

15 Table 2. The effect of the subsdy on re-employment rates. (1) (2) (3) (4) older*low educ*after (0.010) older*low.prev.wage*after (0.019) (0.021) (0.022) (0.046) Wage <3000 Wage<3000 & Age 55 The dependent varable s a bnary ndcator that an unemployed person s re-employed at the end of the followng year. Sample average The sample conssts of workers who were and unemployed at the end of year t-1. Standard errors are n parentheses. All specfcaton nclude controls for age, age and year nteractons, gender. Specfcaton 1 has also control for low educaton, low educaton*year, low educaton*older. Specfcatons 2-4 control also for low prev. wage, low prev. wage*year, low prev. wage* older. 6. The mpact of the low-wage subsdy on job ext rates, wages and workng hours In ths secton we examne the mpact of the low-wage subsdy scheme on the probablty of extng from current employment. As entry nto new jobs s relatvely rare at old ages, reducng exts could be a key channel to how the subsdy could affect employment. In addton we examne the effect of low-wage subsdy on wages and workng hours. The data for ths secton come from the payroll records of the Fnnsh employers assocaton. The data cover all prvate sector workers except the frm s top management n frms that are members of the assocaton and provde nformaton about monthly wages, workng tme, and some nformaton about workers ndvdual characterstcs such as age, gender and educaton. The data contans pseudo ID codes dentfyng each person and each frm that allow the same person to be followed over tme as long as the person remans employed by a frm that s ncluded n the data. In addton, we have access to regster data from the tax authortes that ncludes the actual subsdes pad to all ndvduals n Fnland. The man beneft of the data s that wages are accurately reported. In most frms the wage data comes drectly from the frm s pay system. Hours are also reported accurately n the frms that pay hourly wages. The frms that pay monthly salares typcally only report normal weekly hours. Even ths nformaton s lkely to be more relable than self-reported hours n household surveys. 13

16 The sample that we use n the emprcal analyss s constructed as follows. We have two years of data before the reform (2004 and 2005) and two years after the reform (2006 and 2007). We drew four separate samples: for each year; we take those employed at the end of the prevous year (t-1) and follow them untl the end of year t. To lmt the comparson group to reasonably smlar workers we restrcted both samples to those over 45 and below 59 years at the tme when the wage nformaton was collected (tme t-1). In addton, we only consder employees whose wage s less than 3,000 per month. We determne elgblty for the subsdy based on age and monthly wage n year t-1, and calculate the subsdy based on monthly wage n that year. We begn by dvdng the data nto two age groups (below 54/above 54) and two wage groups (below 2,000/above 2,000). We thus have four dfferent age-wage categores. Our treatment group s the workers who are elgble for the subsdy,.e. older low-wage workers. Notce that we do not restrct the treatment group to full-tme workers. If we dd ths, we would not capture the possblty that a part-tme worker could become a full-tme worker because of the ntroducton of the subsdy. 14 Table 3 collects some descrptve analyss of the target and the control group n the post- reform years, 2006 and Most elgble workers work n the servce sector. The share of female workers n the treatment group s hgher than ther average share n both sectors. Not surprsngly, workers n the treatment group are also less educated than other workers. The mean wage n the elgble group s at the phase-out range of the subsdy, suggestng that most of the employers of the target group workers face a progressve payroll tax system. The table also reports the share of those who actually receved the subsdy among the elgble. The take-up rate s calculated as the share of those who actually receved the beneft n year t accordng to data from the Tax Regster to those who would elgble for the beneft accordng to the wage and the workng hours reported n the employers assocaton data. Not all employers of the elgble used the subsdy. The take-up rate s 64% n the servce sector and % n the ndustral sector. 14 On the other hand, the treatment group now ncludes part-tme workers who are not elgble for the subsdy. We also analysed the case where the treatment group was restrcted to full-tme workers. See the dscusson at the end of Secton Analyss of the take-up rate reveals that take-up s hgher n bgger frms and n frms where the mean wage s smaller than the average. Representatves of the federatons of ndustres and entrepreneurs have suggested that 14

17 Table 3. Descrptve statstcs from payroll data. Servce sector Industral sector Elgble* Others Elgble* Others Obs Female Basc edu Secondary edu Academc edu Age at t Wage at t Fulltme at t Take-up rate ** Subsdy ** *Elgblty s defned as havng a wage between euros a month n year t-1 and beng over 53 years old n year t-1. **Mean monthly value of the subsdy n year t for those who receved any subsdy. Ths table was prepared usng only (post reform) years 2006 and The take-up rates are calculated usng actual realsed wages and workng hours (unlke n regressons where elgblty s determned on the bass of wages at the prevous perod, wthout workng hours restrctons). We begn by estmatng the effect of the low-wage subsdy on the job ext rate. We defned those who were not found n the same frm the next year as leavers. As prevously we use the dfference-n-dfference-n-dfferences strategy. The regresson equaton has a form smlar to Equaton (2) n Secton 5: P(Et = 1 Et 1 = 0)= + 1X t + (YEAR AGEG )+ (YEAR WAGEG 6 t YEAR + AGEG+ WAGEG t 2 t 3, t 1 )+ (YEAR AGEG WAGEG 8 4 t, t 1 + (AGEG WAGEG 5, t 1 ), t 1 ) (3) In ths equaton P(Et = 0 Et 1 = 1) s the probablty that a worker leaves a frm between t-1 and t. The WAGEG varable s now an ndcator varable that gets value one f the monthly wages n year t-1 were below 2,000 EUR. As explaned n secton 5, ths specfcaton controls for any permanent dfferences between treatment and control groups as well as any smultaneous changes affectng employment of all older workers or employment of all lowwage workers at the tme when the low-wage subsdy was ntroduced. The thrd level cumbersome admnstratve detals related to the subsdy system may explan why some frms have not appled for the subsdes. 16 In our analyss elgblty s defned usng the prevous year s earnngs and age, and thus the share of workers who actually receved the subsdy s even lower than when measured by current earnngs and workng hours n the year when subsdy scheme was at place. The take-up rate for the elgble n ths set up s 0.42 n the ndustral sector and 0.52 n the servce sector. Some people n the non-elgble group also receved the subsdy, the share s 0.02 for the servce sector and 0.01 for the ndustral sector. 15

18 nteracton term ( 8 ) captures all varatons n outcome specfc to older low-wage workers after the ntroducton of the low-wage subsdy scheme. We also estmate a specfcaton where we replaced the treatment-dummy varable (YEAR t AGEG WAGEG) wth the amount of the subsdy the employer would be elgble for. Now the effect of the subsdy s also dentfed from the dfferences n the sze of the subsdy among the elgble group. Snce the sze of the subsdy depends on the wage level we replace the rough low-wage hgh-wage groups wth fner 100 euro wage ntervals. At the same tme we fully control for age by ncludng t as one-year age dummes. We calculated the low-wage subsdy that the frm would get for each worker n year t f hs/her wage remaned unchanged from year t-1. Snce the payroll tax subsdy was ntroduced only n 2006, ths measure s zero for all workers n the 2003 and 2004 samples. For the 2005 sample the measure gets postve values f the 2005 wage s below 2,000 euros and f the worker s over 53 (.e. over 54 and hence elgble n 2006), and lkewse for the 2006 sample. Our model s therefore dentfed from the dfferences n the changes n job-leavng rates between the group that becomes elgble for the low-wage subsdes and groups that are ether too young to be elgble or have a wage exceedng 2,000 euro. In both cases we estmate the mpacts of the elgblty for the low-wage subsdy, not the effect of actually recevng the subsdy. As we report n the emprcal secton, the take-up rates were well below 100 per cent, ndcatng that not all frms that are elgble for the subsdy ever apply for t 17. We use a smlar specfcaton when we examne the effects on hours and wages condtonal on employment. In ths analyss of adjustment n the ntensve margn we lmt the data to those who are employed n the same frm n both years t-1 and t. The dependent varable s ether log hourly wages or log weekly hours. Table 4 llustrates a DDD estmaton of the effect of low-wage subsdy on job-leavng rates for the ndustral sector. The upper panel compares the change n job ext rates for older lowwage workers (treatment ndvduals) before and after the ntroducton of the low-wage subsdy scheme wth the change n the job ext rates of younger low-wage workers. Each cell contans the mean job-leavng rate for the group labelled on the axes, along wth standard errors and the number of observatons. There s a clear fall n the job-leavng rates for both groups durng ths perod. The dfference-n-dfferences estmate,.e. the dfference n the 17 Our results should therefore be nterpreted as effects of elgblty, or ntenton to treat effect. 16

19 changes of the job-leavng rate between older and younger low-wage workers s -2.5 per cent. If there was a dstnct labour market shock that affected older workers over ths perod, ths estmate would not correctly dentfy the mpact of the low-wage subsdy scheme. In the bottom panel we perform the same exercse for hgh-wage workers. The dfference between the change n the job-leavng rate for older and younger hgh-wage workers s also negatve, per cent. Takng the dfference between these two panels, we get the DDD estmate, whch s negatve but not statstcally sgnfcant. In the lower panel we perform the same exercse for servce sector workers. The DD between older and younger low-wage workers ndcates a 2.2 per cent fall n the job-leavng rate. Ths dfference s smlar for hgh-wage workers (2.5 per cent). Accordng to the lower panel, the DDD estmate ndcates that there was no change n the job-leavng rate of the target group. The results n ths table demonstrate the power and mportance of the DDD estmaton. Wthout the other control group, one would mstakenly conclude that the subsdy system was effectve n reducng ext rates. The frst row of Table 5 presents the results of the same analyss n a regresson framework. We frst re-report the coeffcent of the treatment varable (older*low-wage*after) n our DDD specfcaton for ndustral sector workers. We estmate ths lnear probablty model by OLS. In Column 2 we control for other observables, such as educatonal category (4), gender, unon contract, and two-dgt ndustry. Addng these control varables does not render the coeffcent sgnfcant. The lower panel reports the results of a specfcaton where we explan the job-leavng rate by the amount of the subsdy the worker s employer s elgble for (n 100 euro). The specfcaton n the frst column ncludes controls for age-group, wage-group and tme perod. In the next column we report the results for a specfcaton whch controls for tme-specfc shocks to age- and wage-groups, as well as age-group wage-group nteracton. Now we fnd that even f we take nto account the actual amount of the subsdy the employers could be elgble for, the system s stll not effectve n reducng ext rates. The result remans when controls for gender, educaton and ndustry are ncluded. 17

20 Table 4. DDD Estmates of the mpact of low-wage subsdy on ext rate. Wage < 2000 age > (.431 ) [13158] age < (.405) Wage > Industral sector before after dfference dff-n-dff (.393) (.005) [13332] [15606] age > (.414) [40251] age < (.381) [55444] Wage < 2000 age > (.441) [13458] age < (.423) Wage (.381) [15596] (.004) (.008) Before After dfference dff-n-dff (.399) (.003) [40349].177 (.382) [49628] Servce sector.001 (.002 ) (.004) DDD: (.008) Before after dfference dff-n-dff (.443) (.005) [17159] [19588] age > (.364) [19939] age < (.340) [30203].259 (.438) [23434].025 (.004) (.007) Before after dfference dff-n-dff (.369) (.003) [26878].165 (.371) [36834].031 (.003) (.004) DDD:.003 (.008) Each cell contans mean ext rate (job leavng rate between t-1 and t) for the group dentfed. Standard errors are gven n parentheses; sample szes are gven n square brackets. Sample consst of years old workers n year t-1. 18

21 Columns 3 and 4 report the same estmatons for servce-sector workers. The addtonal control varables nclude dummes for gender, educatonal category and educatonal feld. The results ndcate that subsdy scheme had not mpact on job leavng rate. Snce a smultaneous penson reform made t easer for 55-year old workers to leave to earlyretrement, we have checked the robustness of the results when ths age group s dropped from the sample. The qualtatve results reman the same: the ext rates dd not declne n a statstcally sgnfcant way n ether sector. 18 Table 5. Effect of low wage subsdy on job-leavng rates (DDD estmates). Industral sector Servce sector Specfcaton I (1) (2) (3) (4) Treat*after (0.008) (0.008) (0.008) (0.008) Controls x x Observatons R-squared Specfcaton II (1) (2) Amount of subsdy/ (0.006) (0.006) (0.005) (0.005) Controls x x Observatons R-squared Dependent varable: worker exts frm between t-1 and t. The sample conssts of workers who were years old whose earnngs were between 900 and 3000 euros n year t-1. The upper panel reports the coeffcent on the thrd level nteracton (older*low-wage*after) of equaton (2). In all columns other controls are dummes for older, low-wage, (older*low-wage), after and (older*after) and (low-wage*after) nteractons. The addtonal controls for ndustral sector (column 2) nclude educatonal category (4), gender, unon contract, and two-dgt ndustry and for servce sector (column 4) gender, educatonal category and educatonal feld. The lower panel reports the coeffcent of amount of subsdy (n 100 euros). In all columns the controls nclude age dummes, wage group dummes (by 100 euros), wageg*after, ageg*after, and ageg*wageg nteractons. Columns 2 and 4 nclude also addtonal controls reported above. Standard errors n parentheses.* sgnfcant at 5%; ** sgnfcant at 1%. Next, we analyse how low-wage subsdes affected workng hours and earnngs for those who remaned wth ther employer. Table 6 reports the OLS estmates of the thrd-level nteracton from equaton (1), where the dependent varable s now the log weekly workng hours. From the upper panel, we fnd that the ntroducton of the wage subsdy ncreased the workng hours for older workers n the ndustral sector by almost 4.5 per cent. The lower panel suggests, however, that when measured by the actual amount of the subsdy the employers are elgble for, the mpact on workng hours decreases to 1.8 per cent. There are probably some 18 These results are avalable from the authors upon request. 19

22 non-lnear effects on workng hours, dependng on the workers wage level. There seems to be no effect of the low-wage subsdy for servce-sector workers. We also nvestgated whether ths ncrease n workng hours was due to a possble ncrease n the share of full-tme workers wthn the group of older low-wage workers. Our results (not reported) ndcated that the lowwage subsdy dd, n fact, sgnfcantly ncrease the lkelhood of becomng a full-tme worker for part-tme workers n the ndustral sector 19. Table 6. Effect of low-wage subsdy on workng hours for stayers (DDD estmates). Industral sector Servce sector Specfcaton I (1) (2) (3) (4) Treat*after (0.005)** (0.005)** (0.002) (0.002) Controls x x Observatons R-squared Specfcaton II (1) (2) (3) (4) Amount of subsdy (0.004)** (0.004)** (0.001) (0.001) Controls x Observatons R-squared Dependent varable: log. weekly workng hours at t. The sample conssts of workers who were years old whose earnngs were between 900 and 3000 euros n year t-1 and who remaned wth ther employer untl the end of year t. The upper panel reports the coeffcent on the thrd level nteracton (older*low-wage*after) of equaton (3). In all columns controls nclude dummes for older, low-wage, (older*low-wage), after and (older*after) and (low-wage*after) nteractons. The addtonal controls for ndustral sector (column 2) nclude educatonal category (4), gender, unon contract, and two-dgt ndustry and for servce sector (column 4) gender, educatonal category and educatonal feld. The lower panel reports the coeffcent of amount of subsdy (n 100 euros). In all columns the controls nclude age dummes, wage group dummes (by 100 euros), wageg*after, ageg*after, and ageg*wageg nteractons. Columns 2 and 4 nclude also addtonal controls reported above. Standard errors n parentheses.* sgnfcant at 5%; ** sgnfcant at 1%. Table 7 reports the results of regresson where the dependent varable s log real hourly wages. The sample conssts of stayers,.e. workers who have remaned wth the same employer for at least two perods. For the ndustral sector there seems to be an almost 2 per cent decrease n hourly wages. For the servce sector the results are less clear. The low wage subsdy had no or very lttle effect on hourly wages The subsdy ncreased the lkelhood of becomng a full-tme worker by 7 per cent. Subsdes had no mpact on the workng hours of workers who were already full-tme workers n year t. 20 Even though the hourly wages decreased n the ndustral sector, the monthly wages ncreased, snce there was an overall ncrease n workng hours. 20

23 All these estmatons were carred out usng the subsdy elgblty defnton, whch s based on age and earnngs n year t-1. Ths ncludes both part-tme and full-tme workers. As a robustness check we examned how results change f elgblty for the subsdy s restrcted only to full-tme workers n year t-1. We ncluded controls for full-tme work n tme t-1 n these regressons. Ths dd not have an effect on our results. Table 7. Effect of low-wage subsdy on hourly wages for stayers (DDD estmates). Industral sector Servce sector Specfcaton I (1) (2) (3) (4) Treat*after (0.003)** (0.003)** (0.003) (0.003) Controls x x Observatons R-squared Specfcaton II (1) (2) (3) (4) Amount of subsdy (0.003)** (0.002)** (0.001)** (0.001)* Controls x x Observatons R-squared Dependent varable: hourly wage at t. The sample conssts of workers who were years old whose earnngs were between 900 and 3000 euros n year t-1 and who remaned wth ther employer untl the end of year t. The upper panel reports the coeffcent on the thrd level nteracton (older*low-wage*after) of equaton (3). In all columns controls nclude dummes for older, low-wage, (older*low-wage), after and (older*after) and (lowwage*after) nteractons. The addtonal controls for ndustral sector (column 2) nclude educatonal category (4), gender, unon contract, and two-dgt ndustry and for servce sector (column 4) gender, educatonal category and educatonal feld. The lower panel reports the coeffcent of amount of subsdy (n 100 euros). In all columns the controls nclude age dummes, wage group dummes (by 100 euros), wageg*after, ageg*after, and ageg*wageg nteractons. Columns 2 and 4 nclude also addtonal controls reported above. Standard errors n parentheses.* sgnfcant at 5%; ** sgnfcant at 1%. 7. Some Extensons As noted above, the comparson of changes n the ext rates, hours worked and wages between those who are elgble for the low-wage subsdy and those who are not reveals the mpact of the reform, not the mpact of actually recevng wage subsdes. As long as we are prmarly concerned about the effects of ntroducng a low-wage subsdy polcy, ths s probably the man parameter of nterest. However, ncomplete take-up s lkely to lead to smaller employment effects than a polcy that would automatcally reduce payroll taxes for the elgble workers. If we are nterested n evaluatng the effects of actually recevng low-wage 21