Haywood , L., Neumann, M.

Equilibrium effects of tax exemptions for low pay

in Labour Economics, 07.04.2021

Peer Review , Sustainable Resource Management and Global Change

Across the world, tax exemptions for jobs with low earnings intend to incite non-participating workers to rejoin the labor market. However, such tax exemptions may also have negative equilibrium effects. The German minijob tax exemption offers a convenient case to identify equilibrium effects as it applies to some but not to other low-wage jobs. We build and estimate a structural job search model with discontinuous taxes on German administrative data. Counterfactual policy simulations highlight distributional consequences of reforming the tax exemption. We find that 1.99 million individuals only participate in the labor market due to the tax exemption. A budget-neutral removal of the tax subsidy hurts these workers (e.g. retirees, students), but benefits those who seek small jobs independently of the tax exemption. Furthermore, a removal would result in greater variance in equilibrium wages, benefiting workers who search more (those without another job) at the cost of workers searching less (e.g. those seeking a second job).