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Payroll Taxes, Social Insurance and Business Cycles

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  • Burda, Michael
  • Weder, Mark

Abstract

Payroll taxes represent a major distortionary influence of governments on labor markets. This paper examines the role of payroll taxation 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 eff ort. A balanced social insurance budget renders gross wages more rigid over the cycle and, as a result, strengthens the model?s endogenous propagation mechanism. For conventional calibrations, the model generates a negatively sloped Beveridge curve as well as substantial volatility and persistence of vacancies and unemployment.

Suggested Citation

  • Burda, Michael & Weder, Mark, 2010. "Payroll Taxes, Social Insurance and Business Cycles," CEPR Discussion Papers 7984, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7984
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    More about this item

    Keywords

    Business cycles; Consumption-tightness puzzle; Labor markets; Payroll taxes; Unemployment;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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