Sophie Cottet, University of Stavanger

"Firms Matter: Understanding the Effects of Payroll Tax Reductions for Minimum Wage Workers"

Abstract

This paper studies how firms adjust to targeted reductions in payroll taxes for minimum-wage workers. Leveraging reforms in France in the mid-1990s that reduced minimum labor costs by up to 10 percent, I combine linked employer–employee data and balance sheets data to analyze both market-level and firm-level responses. Aggregate minimum-wage employment increases substantially, with an own-cost elasticity of -2. This effect is entirely driven by firms for which the reform barely affected total labor costs. Firms most exposed to the tax cut—those receiving the largest mechanical reduction in labor costs—do not expand minimum-wage employment. Instead, they experience temporary increases in profits and short-run employment growth, particularly when financially con-strained. These findings contradict the predictions of the standard competitive model and suggest that initial input composition and cash constraints mediate labor demand responses. Targeted payroll tax cuts therefore operate not only through relative factor price changes, but also through firm-level balance sheet effects.

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