Lower payroll taxes for young workers : Was the introduction of the payroll tax reductions for young employees an effective way to lower youth unemployment?

Abstract: This thesis studies the effects on the unemployment rate and average income due to the payroll tax cuts for young workers in Sweden. The method that has been used is a difference-in-difference approach with two different control groups. The unemployment rate for Swedish individuals at age 15-24 has been matched towards individuals at the same age in Finland and Denmark. The data behind the estimations is picked from the database of Eurostat. The results indicate an increase in the unemployment rate, contrary to the expectations from the theoretical framework in the subject. One possible explanation for a lack of increase in employment due to a targeted tax cut is shifting, meaning that the lowered cost for firms is shifted onto the employees’ wages. However, no significant results on the wage effect were found, so no such conclusion can be made. The explanation could lay in modeling problems, a growing labor force or the supply of labor (which may choose other alternatives than employment). By the results of this report, the main conclusion is that the payroll tax reductions did not reduce the high unemployment rate among young individuals in Sweden.