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Payroll Taxes, Social Insurance and Business Cycles

  • Burda, Michael C
  • Weder, Mark

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7984.

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Date of creation: Sep 2010
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Handle: RePEc:cpr:ceprdp:7984
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