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Payroll Taxes, Social Insurance and Business Cycles

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  • Burda, Michael C.

    (Humboldt University Berlin)

  • Weder, Mark

    (University of Adelaide)

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 effort. 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 C. & Weder, Mark, 2010. "Payroll Taxes, Social Insurance and Business Cycles," IZA Discussion Papers 5150, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp5150
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    References listed on IDEAS

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    More about this item

    Keywords

    consumption-tightness puzzle; unemployment; payroll taxes; labor markets; business cycles;
    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
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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