DP12096 Social Security Contributions and the Business Cycle

Author(s): Anna Almosova, Michael C Burda, Simon Voigts
Publication Date: June 2017
Keyword(s): Business cycle, labor wedge, payroll tax, social security contributions
JEL(s): E24, E32, H55, J32
Programme Areas: Public Economics, Monetary Economics and Fluctuations
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12096

This paper examines magnitudes and business cycle dynamics of social security contributions (SSC). In most OECD countries studied, we document a negative covariation of payroll tax burdens with GDP and GDP growth at business cycle and lower frequencies. We assess the overall magnitude of the distortion following Barro and Redlick (2011). For most countries, average marginal SSC tax rates exceed average rates, but the latter tracks the former tightly. Changes in average payroll tax burdens are mostly accounted for by changes in tax schedules rather than shifts in the earnings distribution over time. For many countries, SSC rates behave like estimated values of the "labor wedge" (Chari et al. 2007, Brinca et al., 2016).