Social security contributions and employment

Abstract

"The relationship between high social security contributions and the local labour market performance has been and still is intensively discussed in the political arena. Various reform concepts suggested by members of politics and associations are going around. Some measures to restrict the increase in social security contributions have been implemented over the past years. To evaluate the different reform approaches, the causal relationship between social security contributions and employment is of significant importance. The question at the crux of this issue is what effects a change/reduction in the social security contribution rates has on firstly, labour supply and demand alone, and then, when taking into consideration circular-flow effects, on the employment level in the economy as a whole. The analyses of supply and demand show that by reducing social security contributions ceteris paribus additional manpower can be motivated to take up employment, and that companies would be prepared to hire additional workers. This is also true at macroeconomic level. Without counter-financing, the circular-flow model predicts a permanent increase in labour demand, and thus in employment, by 150,000 to 160,000 people in the case of a linear reduction in social security contributions by one percentage point. Considerably lower or even slightly negative employment effects result from counter-financing with direct or indirect taxes or a combination thereof. If the reduction in social security contributions is carried out in an asymmetrical way, for example by means of a tax-free allowance, this results in considerably higher labour market effects than with a linear reduction with an identical volume of financial relief. In order to really be able to realise the additional employment opportunities of low-skilled and low-wage workers provided by an asymmetrical reduction in social security contributions, it would also be important when developing supporting wage policies, for tax increases which also affect low-income groups not to result in a disproportionately large increase in the lower wage groups. This concluding finding shows again the importance of a close co-operation between fiscal policy and collective bargaining policy." (Author's abstract, IAB-Doku) ((en))

Cite article

Kaltenborn, B., Koch, S., Kress, U., Walwei, U. & Zika, G. (2003): Sozialabgaben und Beschäftigung. In: Mitteilungen aus der Arbeitsmarkt- und Berufsforschung, Vol. 36, No. 4, p. 672-688.