Social security contributions distribution and economic activity

Abstract

This paper studies the macroeconomic and welfare implications of the distribution of the social security tax between employees and employers using a general equilibrium framework. We calibrate a dynamic general equilibrium model for the average of OECD countries and find that increasing the share of social security contributions paid by employers has a positive effect on economic activity and welfare. Whereas raising the employer’s share increases the labor cost for firms and reduces the equilibrium gross wage, conversely, workers’ net labor income increases, increasing employment, output, and welfare. The response of the economy to the change in the distribution of social security contributions between employees and employers depends on how the total labor tax wedge changes, which is also affected by the labor income tax and the consumption tax, as distortionary effects from one tax are not independent from the other taxes driving wages’ purchasing power.