Do income tax incentives for job creation targeting young workers in SMEs stimulate employment? Evidence from South Korea

Abstract

Faced with high unemployment and labor mismatches, many countries have mainly focused on stimulating labor demand through job creation policies. However, empirical evidence regarding their effectiveness is mixed, while the impact of labor supply-side policies remains underexplored. This study fills the gap by assessing the effectiveness of a labor supply-side policy—the Job Creation Income Tax Credit in Korea—which provides tax incentives for workers under 35 employed in small and medium-sized enterprises (SMEs). Using event-study and difference-in-differences models with national survey data from 2016 to 2019, we find insignificant effects on overall SME employment among individuals aged 32–34. While no significant effects are observed on regular workers, only low-educated male SME workers ineligible for the credit transition to eligible temporary SME jobs. These findings highlight that modest tax credits are ineffective in promoting employment for highly educated young individuals due to their high reservation wages and inelastic labor supply.