Employment effects of tax cuts in a transition country: evidence from Serbia

During the years preceding the current crisis Serbia had relatively high GDP growth rates. It seems, however, that these growth rates did not have much impact on the employment growth rate, which has been rather low and even negative since 2000. Given that there is quite a high tax wedge in the country, we analyse the impact of labour tax cuts through a reduction in social security contributions on the employment rate for workers of different skill types. Results show that tax shifting is higher, that is, wages will increase more as a result of reduced social contributions for high-skilled than for low-skilled workers. From a policy perspective our results indicate that it could be more effective to focus on selective tax reductions instead of applying across-the-board tax cuts.