Working Paper: CEPR ID: DP7984
Authors: Michael C. Burda; Mark Weder
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 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.
Keywords: business cycles; consumption-tightness puzzle; labor markets; payroll taxes; unemployment
JEL Codes: E24; E32; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| payroll taxes (J32) | labor markets (J40) |
| payroll taxes (J32) | unemployment (J64) |
| payroll taxes (J32) | vacancies (J63) |
| endogeneity of payroll taxation (H29) | internal propagation of shocks (F41) |
| countercyclical payroll taxes (H29) | cost of labor (J30) |
| countercyclical payroll taxes (H29) | value of vacancies to firms (J63) |
| countercyclical payroll taxes (H29) | time spent by workers in search (J29) |
| elasticity of search activity (R12) | intertemporal path of the wedge between costs to firms and income received by households (D15) |
| countercyclical payroll taxes (H29) | Beveridge curve (J69) |