Burda, M.Weder, M.2016-04-052016-04-052016Journal of the European Economic Association, 2016; 14(2):438-4671542-47661542-4774http://hdl.handle.net/2440/98232Article first published online: 21 JUL 2015Payroll 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.en© 2015 by the European Economic AssociationBusiness cyclesconsumption-tightness puzzlelabor marketspayroll taxesunemploymentJournal article003003311310.1111/jeea.121450003730617000052-s2.0-849612047712-s2.0-84937510265178583