Taxing the Gender Gap: Labor Market Effects of a Payroll Tax Cut for Women in Italy

Abstract

This paper studies the role of government policies to stimulate female labor demand in gender imbalanced labor markets. I focus on a large employer-borne payroll tax cut for new female hires implemented in Italy since 2013. The preferential tax scheme provides more favorable eligibility criteria in contexts with low female participation rates. I combine social security data with several empirical approaches, leveraging the time-limited application of the tax scheme and discontinuities in eligibility criteria across municipalities, cohorts and occupations. I present four key results. First, employers pocket the tax cut: I find no effect on net- of-tax wages of directly treated workers, suggesting that tax incidence is mostly on firms. Second, I provide compelling evidence of long-lasting growth in female employment and a drop in the average non-employment duration of women entering unemployment insurance after the reform. Third, despite the time-limited nature of the preferential tax scheme creates a substantial notch in the budget constraint of employers, I find small, although statistically significant, bunching in job duration. Fourth, firms hiring many female workers experience significant growth in sales, profits, value added and capital per-worker, without raising male employees’ layoffs. Effects are mostly concentrated among firms operating in industries where a large portion of the workforce has conservative gender beliefs. These findings suggest that employer-borne payroll tax cuts are a successful strategy to promote female employment and business growth in contexts where gender attitudes are still traditional, but they are not sufficient for closing the gender pay gap.