Seminar: Michael Burda, Humboldt University, Berlin

Title: Payroll Taxes, Social Insurance and Business Cycles

Abstract: Payroll taxes represent a major influence of governments on labor markets. While often described as "contributions to social insurance," they represent distortionary labor taxation and have important effects on the functioning of labor markets and the macroeconomy. This paper examines the role of labor taxation and the social safety net for cyclical fluctuations in an nonmonetary economy with labor market frictions and unemployment assistance which is only imperfectly related to search effort. A continuously 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 can match the high volatility of vacancies and unemployment relative to labor productivity in European countries.