This paper evaluates the effects of the elimination of a payroll tax on employment and wages in four manufacturing and service sectors in Brazil in early 2012. This tax, which accounted for 20 percent of the wage bill, was levied on employers and financed social security programmes. This study is based on administrative records from the Brazilian Ministry of Labour which contained information on formal employment contracts. Exploring the fact that the tax reform only covered firms not under a special tax regime for micro and small firms, a difference-in-differences approach with firm fixed effects was implemented to compare covered and uncovered firms controlling for sector, region and other covariates. The estimates suggest that, on average, the policy led to a 15 percent increase in employment, total labour input measured by contracted hours of work rose by 9 percent, and wages increased by 2 percent. These results indicate that in its first year of implementation the policy had positive employment effects and a partial shifting of the tax benefit onto labour.

Additional Metadata
Keywords payroll tax, labour demand, employment, wages, Brazil, social security
Publisher International Institute of Social Studies of Erasmus University (ISS)
Persistent URL hdl.handle.net/1765/77532
Series ISS Working Papers - General Series
Journal ISS Working Paper Series / General Series
Citation
Scherer, C.R. (2015). Payroll tax reduction in Brazil : Effects on employment and wages (No. 602). ISS Working Paper Series / General Series (Vol. 602, pp. 1–64). International Institute of Social Studies of Erasmus University (ISS). Retrieved from http://hdl.handle.net/1765/77532