The Effect of Earned Income Tax Credit on Youths Employment - A Difference-in-Difference Analysis of the Reform in 2007

The aim of this study is to investigate whether or not the tax cut reform of year 2007 in Sweden had an impact on youths in the Swedish labor market. The study focuses on youths in the ages between 15-24 years and is using activity, employment and unemployment rates as variables of interest. The aim of the reform was to increase labor market participation and it was primarily designed to give incentives to those groups with low economic status. A panel data design was applied, and data was gathered from the European data bank, Eurostat. To investigate the impact of the reform the methodology of difference-in-difference was used, and two groups were formed. The groups were the treatment group, including Sweden and its regions, and the control group, including Austria, Iceland, Norway and Switzerland and their regions. This study is unique in that no previous research has been made with youths as the focus group when evaluating in-work benefits reforms. The results on national level show that the activity rate for youths increased by 2.152% after the reform was implemented. Contradicting this, the unemployment rate increased by 1.817%, which we connect to the effects of the financial crisis that occurred just one year after the reform. Furthermore, the results for employment rate are insignificant on all levels. The results for regions are all insignificant which indicates that the method needs to be refined in order to further expand the study. Based on these findings we draw the conclusion that there has been an impact on youth’s labor market participation and activity rate, but there are difficulties when trying to interpret if the reform was successful or not