butions was HUF 230,700 ($1,045) (Hungarian Central Statistical Office, 2022) so the payroll tax cut was 6.3% of the average salary.<sup>15</sup> The cut applied to both new and ongoing private sector jobs. Workers in the public sector and the self-employed were not eligible for the cut. Besides workers aged over 55, workers under the age of 25 were also eligible for the tax cut. We discuss the impact of the policy on them in Section 7.2. Furthermore, workers in elementary occupations received the tax cut independently of their age.<sup>16</sup> In our primary analysis we include workers in elementary occupations, but our results are robust to the exclusion of those workers from the definition of private sector employment (see Appendix Table B4).

Figure 2 depicts the average effective payroll tax rate paid by employers by employee age before and after the payroll tax cut was implemented. It shows the discontinuity at age 55 after the policy took effect (in gray) compared to the constant rate of 28.5% before (in black). After the policy took effect the average tax rate is lower than 28.5% (rate without cut) at all ages due to the fact that workers in elementary occupations could get the tax cut independently of age. Furthermore, there is a drop from 26.3% to 20% or by about 6.3 percentage points from age 54 to 55. It is worth highlighting that such a drop in the tax rate does not create a discontinuity in hiring incentives at age 55. From the firm’s perspective, hiring someone one day short of age 55 is almost the same as hiring someone at exactly age 55 as the difference is simply the one day for which higher taxes need to be paid, while once age 55 is reached, the same amount of tax cut is received. That is why we apply a difference-in-differences empirical strategy described in detail in Section 4, instead of a regression discontinuity strategy.

The reform only affected the social security contributions paid by employers, while the part paid by the employees was unaffected. Employees before and after the reform paid a 16% flat-rate tax and employee social security contributions of 18.5%.<sup>17</sup> Furthermore, the reform did not affect the link between social security contributions and future benefits (such as pensions) as those are calculated based on net wages and not based on contributions to the social security funds.

> 15The exact rules were the following. The social security contribution paid by employers was decreased from 28.5% to 14%, but the total amount of the tax cut was capped at HUF 14,500. As the minimum wage in 2013 was HUF 98,000 ($444), almost everybody hit the cap. For the few workers who earned exactly the minimum wage at HUF 98,000 in 2013, the tax cut was HUF 14,250. In 2014, the minimum wage was raised to HUF 101,500 ($460).

> 16Long-term unemployed re-entering the labor market, people returning to work after child-care leave, or younger workers entering the labor market received the tax benefit for 2 years independently of their age. The prevalence of these other beneficiary groups is close to zero for those aged 52-57.

> 17The tax wedge on labor is quite high in Hungary. Adding social security contributions and the income tax the average tax wedge was close to 50% in this period, which is much higher than the OECD average of 35.5% (OECD, 2022 _a_ ).

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