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Discussion Paper Details

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Title: Payroll Taxes, Social Insurance and Business Cycles

Author(s): Michael C Burda and Mark Weder

Publication Date: September 2010

Keyword(s): Business cycles, consumption-tightness puzzle, labor markets, payroll taxes and unemployment

Programme Area(s): Labour Economics

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.

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Bibliographic Reference

Burda, M and Weder, M. 2010. 'Payroll Taxes, Social Insurance and Business Cycles'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7984