Payroll taxes, social insurance and business cycles
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Date
2016
Authors
Burda, M.
Weder, M.
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Journal article
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Journal of the European Economic Association, 2016; 14(2):438-467
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Michael C. Burda and Mark Weder
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Abstract
Payroll taxes represent a major distortionary influence of governments on labor markets. This paper examines the role of time-varying payroll taxes and the social safety net for cyclical fluctuations in a nonmonetary economy with labor market frictions and unemployment insurance, when the latter is only imperfectly related to search effort. A balanced social insurance budget induces countercyclical payroll taxation, renders gross wages more rigid over the cycle and strengthens the model's endogenous propagation mechanism. For conventional calibrations, the model generates a negatively sloped Beveridge curve and countercyclical unemployment as well as substantial volatility and persistence of vacancies and unemployment.
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Article first published online: 21 JUL 2015
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© 2015 by the European Economic Association