Abstract

Tax credit for employment and investment is assessed as having a positive effect in increasing the number of jobs because it gives tax benefits only to the business asset investment accompanied with increase in employment. However, there is some concern that it may cause unnecessary labor demand and adversely affect labor investment efficiency. We analyze the policy effectiveness of tax credit for employment and investment from the viewpoint of labor investment efficiency. In this study, labor investment efficiency is measured as the absolute value of the difference between actual employment growth rate and expected employment growth rate. Using non－financial listed companies over 2011 to 2015, we show that tax credit for employment and investment is positively related to labor investment efficiency. In addition, we divide the sample firms into over－employment companies and under－employment companies and reanalyze. We find that tax credit for employment and investment has a negative effect on labor investment efficiency for over－employment companies, but has a positive effect on that for underemployment companies. These results show that tax credit for employment and investment is effective in improving overall labor investment efficiency by raising the employment growth rate of under－employment companies to the appropriate level. Meanwhile, we find that higher labor investment efficiency is associated with higher future profitability. This study contributes to the literature by suggesting the benefits of tax credit for employment and investment from the viewpoint of labor investment efficiency.

Keywords

• tax credit for employment
• labor investment efficiency
• job creation

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