Abstract :
"Introduced in France in the 1990s to reduce labor costs in a context of high unemployment, tax relief policies for low-wage earners have been expanded over the years and now account for nearly 3% of GDP. In this study, we evaluate the effects of payroll tax reductions for low wages on employment, fiscal surplus, and welfare. We develop a life-cycle matching model in which workers are heterogeneous in terms of age, education, human capital, family status, and idiosyncratic productivity, and where job search, working hours, hiring, and separation decisions are endogenous. We show that payroll tax cuts increase employment but reduce the fiscal surplus. We also demonstrate that raising the minimum wage decreases employment, with the magnitude of the effect depending on whether payroll tax reductions, taxes, and social transfers are indexed to the minimum wage. Finally, we use the model to identify the optimal payroll tax reduction policy. We show that there exists a specific payroll tax schedule that can simultaneously boost employment, fiscal surplus, and welfare."