Payroll Taxes, Social Insurance and Business Cycles

Payroll taxes represent a major distortionary influence of governments on labor markets. Thispaper examines the role of payroll taxation and the social safety net for cyclical fluctuations ina nonmonetary economy with labor market frictions and unemployment insurance, when thelatter is only imperfectly related to search effort. A balanced social insurance budget rendersgross wages more rigid over the cycle and, as a result, strengthens the model’s endogenouspropagation mechanism. For conventional calibrations, the model generates a negativelysloped Beveridge curve as well as substantial volatility and persistence of vacancies andunemployment....