Payroll Taxes, Social Insurance and Business Cycles

Payroll taxes represent a major distortionary in uence of governments on labor markets. This paper examines the role of payroll taxation and the social safety net for cyclical uctuations in an nonmonetary economy with labor market frictions and unemployment insurance, when the latter is only imperfectly related to search e 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 downwardly-sloped Beveridge curve as well as substantial volatility and persistence of vacancies and unemployment.