DP7984 Payroll Taxes, Social Insurance and Business Cycles
| Author(s): | Michael C Burda, Mark Weder |
| Publication Date: | September 2010 |
| Keyword(s): | Business cycles, consumption-tightness puzzle, labor markets, payroll taxes, unemployment |
| JEL(s): | E24, E32, J64 |
| Programme Areas: | Labour Economics |
| Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=7984 |
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.