Phasing out payroll tax subsidies

Abstract

Many countries subsidize low income employments or small jobs. These subsidies and their phasing out can generate labor market frictions and distort incentives. The German Minijob program subsidizes low income jobs. It generates a 'Minijob trap' with substantial bunching along the earnings distribution. Since 2003, the Midijob subsidy aims to reduce the Minijob-induced notch in the net earnings distribution. Midijobs reduce payroll taxes for employments above the Minijob earnings ceiling. We investigate whether introducing Midijobs reduced the Minijob trap. We apply a regression discontinuity design using administrative data and a difference-in-differences estimation using survey data. While our results show a small positive overall effect of Midijobs on transitions out of Minijobs they are effective only for a narrow treatment group.