Payroll tax reduction in Brazil: Effects on employment and wages

This paper evaluates the effects of the elimination of a payroll tax on employ-
ment 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 imple-
mented 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 re-
sults indicate that in its first year of implementation the policy had positive
employment effects and a partial shifting of the tax benefit onto labour.