Hysteresis from Employer Subsidies
This paper uses administrative data to analyze a large and 8-year long employer payroll tax rate cut in Sweden for young workers aged 26 or less. First, we document that while active, the reform raised youth employment among the treated workers. The long-run effects are twice as large as the medium-run effects and likely driven by labor demand (as workers' take-home wages did not respond). Second, we document novel labor-demand-driven "hysteresis" from this policy – i.e. persistent employment effects even after the subsidy no longer applies – along two dimensions. Over the lifecycle, employment effects persist even after workers age out of eligibility. Two years after the repeal, employment remains elevated at the maximal reform level in the formerly subsidized ages. These hysteresis effects triple the direct employment effects of the reform. Discrimination against young workers in job posting fell during the reform and does not bounce back after repeal, potentially explaining our results.
We thank David Card, Patrick Kline, and Peter Fredriksson for useful comments. Jesper Ekman, Clancy Green, Linn Hansen, and Katie Donnelly Moran provided outstanding research assistance. We acknowledge financial support from NSF Grant SES-1559014; the Center for Equitable Growth at UC Berkeley and FORTE Grant 2015-00490. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.