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The incidence of payroll taxation: Evidence from chile 09 级劳动经济学 张素蓉.

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Presentation on theme: "The incidence of payroll taxation: Evidence from chile 09 级劳动经济学 张素蓉."— Presentation transcript:

1 The incidence of payroll taxation: Evidence from chile 09 级劳动经济学 张素蓉

2 Background Fact: the increase in payroll taxation burden… OECD countries: 19% to 25% from 1965-88 Sweden: 6% to 40% by the late from 1950 - 1970s Critique: increase labor cost, lower competitiveness, lead to unemployment? Question: Is payroll tax really a cost for employers? Or, does payroll tax certainly lead to labor market efficiency?

3 Traditional View: (w0, E0) TO (W1, E1) The incidence : elasticity of D L and S L

4  Summers(1989): Tax/benefit linkage: Where: We get: Three conditions where full shifting happens: 1)Elastic demand 2) Inelastic supply 3) Full tax-benefit linkage( q = 1 & a = 0)

5 The study of incidence is important If full shifting exists, employer bears no increase in labor cost and there’d be no disemployment( No resulting labor market inefficiency) The incidence of payroll tax is subject to empirical studies! Reality is complicated: the minimum wage shifting may not be possible

6 The incidence of payroll taxation past evidence is mixed…  Brittain(1972):full shifting  Holmlund(1983): 50% shifted problem: omitted variable bias  “wage” –complicated  other mechanism: the structure is strongly correlated with the structure of its tax system(Summer, Gruber and Vergara, 1993) variance among states within a country  Gruber(1991): insurance for workplace injuries – 80% shifted  Gruber(1994): childbirth insurance – full shifting  Concern: 1) value these two insurance more 2) more able to shift 3) US specific

7 Natural experiment: privatization of social security program in chile Social security system in Chile: including pension, sickness/maternity, work injury, unemployment, family allowance different payroll tax rates for “white-collar” and “blue collar” covered 60% labor force and 84% in manufacturing sector privatization: all but work injury government reimbursement for family allowance taxes after privatization data: survey of manufacturing plants in Chile over 1979-1986 firm-level data( employees > 10) Before 1981After 1981 Pay-as-you-goFully funded employer30%5% employee17%25% FinancingEmployer’s contributionGeneral revenue


9 Model


11 Basic regression specification: Cross-sectional regression: difference in difference Average difference estimator: the difference of the average over the 1979- 1980 period and the 1984-1985 period



14 Model Problem: 1) Recession in the 1980s: wage decreased dramatically, unemployment increased, high inflation(25%) 2)Employers were mandated to give an 18% nominal wage rise due to the “privatization 3)The confounding influence of employee contributions: reduction in tax rate causes an increase in employee’s contribution w may include employee’s contribution, when (dw/w)/dt e would NOT be zero!

15 Model  DDD: difference-in-difference-in-difference


17 Model Potential bias:  spurious variation: bias toward full shifting  measurement error in wage bill - toward full shifting  measurement error in tax payments – toward no shifting  maximum taxable earnings – toward full shifting  missing variable: variation in industry risk membership in different social security institutions uncontracted hiring

18 Model IV:  Within-plant instrumental variables instrumented by the other group’s tax rate for each plant  Grouping instrumental variables strategy instrumented with the average tax rate for the industry or area groups for each plant



21 Conclusion No consequences for labor market efficiency from financing social insurance through payroll taxation in this specific case limit applicability because 1)High inflation 2) Downward rigidity for wages 3) what causes the full shifting?

22 Thanks!

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