Labor demand response to labor supply incentives: lessons from the German mini-job reform

This paper analyzes how firms respond to changes in tax benefits for low-earning workers and how such policies also affect high-earning workers. I explore establishment outcomes around Germany's 2003 Mini-Job Reform, which expanded tax benefits for low-earning workers. I document that highly exposed establishments - high proportion of low-earning workers - increase their employees relative to non-exposed establishments - low proportion of such workers. This relative expansion is tilted towards high-earning workers, not targeted by the tax benefits. Nonexposed establishments substitute employment towards low-earning workers without expanding at the same pace. My findings are consistent with a model in which employment growth the policy intended is accompanied by a reallocation of employment and production between highly exposed firms and non-exposed firms, resulting in an efficiency loss.