Work

Phasing out payroll tax subsidies

Year: 2025

Type: article

Abstract: Many countries subsidize low-income employments or small jobs. These subsidies and their phasing out can generate labor market frictions and distort incentives. The German Minijob program subsidizes low-income jobs. It generates a ‘Minijob trap’ with substantial bunching along the earnings distribution. Since 2003, the newly introduced Midijob subsidy aims to reduce the Minijob-induced notch in the net earnings distribution. Midijobs reduce payroll taxes for employments above the Minijob earnings ceiling. We investigate whether introducing Midijobs reduced the Minijob trap. We apply a regression discontinuity design using administrative data and a difference-in-differences estimation using survey data. While in both cases our results show a small positive overall effect of Midijobs on transitions out of Minijobs, they are effective only for a narrow treatment group.

Source: International Tax and Public Finance

DOI: 10.1007/s10797-024-09879-0

Authors: Anna Herget, Regina T. Riphahn

Institution: Friedrich-Alexander-Universität Erlangen-Nürnberg

Language: English

Topic: Labor market dynamics and wage inequality

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Decent work and economic growth, No poverty, Reduced inequalities

Open Access status: hybrid

Estimated APC paid: $3,090