Using Payroll Tax Variation to Unpack the Black Box of Firm-Level Production

The paper presented in this Research Seminar uses quasi-experimental variation in payroll tax rates to investigate how firms use their input factors. The paper finds that higher payroll tax rate implies relatively large employment responses and no effect on employee-level earnings. As the cost of labor increases firms substitute away from low skilled, routine and manual workers, towards more productive workers. The paper also finds that firms decrease their investments as a response to the increased payroll tax rates. Higher firm-level payroll tax rates also slightly decrease the total output of firms. The results of the paper presented in this Research Seminar imply that firm level production and input factor choices are clearly affected by payroll taxes, and that the elasticity of substitution between capital and labor is rather close to zero.