Discussion paper

DP7984 Payroll Taxes, Social Insurance and Business Cycles

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.


Burda, M and M Weder (eds) (2010), “DP7984 Payroll Taxes, Social Insurance and Business Cycles”, CEPR Press Discussion Paper No. 7984. https://cepr.org/publications/dp7984