The (In)effectiveness of Targeted Payroll Tax Reductions

Abstract This paper studies the cost-effectiveness of targeted payroll taxes for stimulating labour demand. It uses rich administrative data to study the effects of an Italian reform that raised social security contributions for apprenticeship contracts, but granted a substantial discount for firms with nine employees or less. The discount does not increase demand for apprenticeship contracts. Instead, it subsidises inframarginal hiring. This reform is not cost-effective. Point estimates imply that each million euros of foregone social security contributions supports the employment of twenty-nine apprentices for one year and no permanent contracts (these estimates are not statistically different from zero).