A study of spillover effects 2014–2019

This report examines whether reduced employer contributions for individuals engaged in research and development (the R&D deduction) affected the wages of the businesses and individuals involved. This is pertinent because the reduction in employer contributions aimed at increasing demand for R&D personnel risks being fully or partially neutralized by higher wage demands, a phenomenon known as wage passthrough.

A previous analysis published by Growth Analysis found that the deduction appears to contribute to an increase in the number of research personnel (Stavlöt and Svensson 2022; 2023), which contradicts full wage pass-through. However, it remains unclear whether the deduction led to any wage pass-through, and if so, how extensive it was. This report investigates the degree of wage pass-through.

The Impact on Wages Examined through a Difference-inDifferences (DiD) Analysis

The analysis was conducted using Swedish registry data on companies and individuals from 2014 to 2019. The R&D deduction was introduced in 2014, allowing companies during the analysis period to pay lower employer contributions up to a maximum of 2.76 million SEK per company per year for personnel working on R&D. The aim of the deduction is to increase the amount of R&D and, in turn, the quantity of innovations and Sweden's growth (Corporate Tax Committee 2012).

To isolate a causal effect in this analysis, control and treatment groups are identified based on the amount of R&D personnel that each company had in the years prior to their utilization of the deduction. The effect of the deduction is then estimated using a difference-in-differences analysis (DiD). Two types of regression analyses are presented: one based on annual company data and another on annual individual data.

No Short-Term Effects on Wages but Likely Long-Term Effects

In summary, our results provide no support for the notion that the R&D deduction has had any short-term impact on the wages of R&D employees. In the long run, approximately four to five years after companies begin utilizing the deduction, parts of our results indicate a positive wage effect, where wages for R&D personnel are approximately three percent higher in the treatment group compared to the control group. This, in turn, suggests that around half of the reduction was passed through to wages after five years. However, this is an uncertain result as a longer follow-up period would be needed to draw more definitive conclusions.

Higher wages for R&D personnel do not negate the possibility that the support may have simultaneously had the intended effect, such as an increase in the number of R&D employees, in accordance with previous findings from Growth Analysis (Stavlöt and Svensson 2022; 2023). Partial wage pass-through is also consistent with what was expected prior to the introduction of the deduction (Corporate Tax Committee 2012). Future studies may, among other things, investigate more long-term effects, further along, and the impact on other phenomena, such as other factor incomes, the quantity of innovations, and patents.