1 / 38

Visibility of social security contributions and employment

Visibility of social security contributions and employment. Iñigo Iturbe-Ormaetxe Universidad de Alicante 4th ECINEQ Meeting, July 2011. Tax incidence. Tax incidence studies the effect of taxes on welfare distribution

ceri
Download Presentation

Visibility of social security contributions and employment

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Visibility of social security contributions and employment Iñigo Iturbe-Ormaetxe Universidad de Alicante 4th ECINEQ Meeting, July 2011

  2. Tax incidence • Tax incidence studies the effect of taxes on welfare distribution • Tax on capital income: owners of capital can pass some (even all) of the tax to consumers (through higher prices) or to workers (through lower wages) • Statutory versus economic incidence • They differ because of behavioral responses Fourth ECINEQ Meeting, Catania, July 18-20 2011

  3. Tax incidence II • Economic theory tells us that economic incidence depends only of the elasticities of demand and supply • It does not depend on statutory incidence • Textbook example: it is irrelevant whether an excise tax is paid by the buyer or the seller Fourth ECINEQ Meeting, Catania, July 18-20 2011

  4. Social Security Contributions • In most countries social security contributions are split between workers and firms • Average total contribution in the OECD countries is 24% of gross wage • Average firm contribution is 15.2%, and average worker contribution is 8.6%. An split of aprox. 2/3 (firm), 1/3 (worker) Fourth ECINEQ Meeting, Catania, July 18-20 2011

  5. Fourth ECINEQ Meeting, Catania, July 18-20 2011

  6. Incidence of contributions • Without binding minimum wages, standard economic analysis predicts that it does not matter who nominally pays the tax (statutory incidence) • Economic incidence depends only on the elasticities of labor demand and labor supply Fourth ECINEQ Meeting, Catania, July 18-20 2011

  7. Incidence of Contributions-2 • Suppose, in particular, that we need to raise contributions by 1%. We know this is detrimental for employment • However, it is irrelevant whether we raise employers contributions by 1% or employees contributions by 1% • Moreover, any change in how contributions are split has no effect on employment or on the cost of labor Fourth ECINEQ Meeting, Catania, July 18-20 2011

  8. Goal of the Paper • I depart from standard analysis in two directions: • First, I assume workers perceive contributions as deferred payments, not as pure taxes (as in Summers 1989) • Workers believe they will receive some future benefits (pensions), because they pay contributions today Fourth ECINEQ Meeting, Catania, July 18-20 2011

  9. Goal of the Paper-2 • Second, I assume that workers value more contributions paid by themselves than those paid by the employer • The reason is that the latter are less “visible” for them • There is some empirical evidence on this Fourth ECINEQ Meeting, Catania, July 18-20 2011

  10. Visibility • Boeri, Börsch-Supan and Tabellini (2001) survey 5500 Europeans about the welfare state • The survey was conducted in 4 countries: France, Germany, Italy, and Spain • One question asked for an estimate of the combined employers’ and employees’ contribution Fourth ECINEQ Meeting, Catania, July 18-20 2011

  11. Visibility • The questions was: “As you know, both employers and employees pay pension contributions. Which fraction of your gross monthly wage goes to public pensions? (Please take into account also your employer contributions)” • Several brackets were suggested • In Spain, for instance, the brackets were 0-21, 21-35, 35+ Fourth ECINEQ Meeting, Catania, July 18-20 2011

  12. Boeri, Börsch-Supan, Tabellini (2001) Fourth ECINEQ Meeting, Catania, July 18-20 2011

  13. Visibility • My interpretation is that workers have little information about contributions paid by firms • Or, at least, they are more myopic with respect to contributions paid by firms • This is what I need to derive my results Fourth ECINEQ Meeting, Catania, July 18-20 2011

  14. Visibility • Additionally, there is a recent survey made in Spain by Fundación Edad y Vida • They ask two questions about knowledge by citizens of contributions • Q1: “What percentage of gross wage is paid by workers as SS contributions?” • Q2: “What percentage of gross wage is paid by workers and firms together as SS contributions?” Fourth ECINEQ Meeting, Catania, July 18-20 2011

  15. Visibility Fourth ECINEQ Meeting, Catania, July 18-20 2011

  16. Results • Under the two assumptions above, I find that changes in contributions paid by firms have more impact on employment than similar changes in contributions paid by workers • As a consequence, any change in how contributions are split that keeps constant total contributions while reducing the share of the firm, has a positive effect on employment Fourth ECINEQ Meeting, Catania, July 18-20 2011

  17. Results-2 • Intuition: firms perceive contributions as pure taxes while workers perceive some linkage with future benefits • Reducing the share of firms is positive for employment (labor demand rises) • Raising the share of workers is negative for employment (labor supply falls) • In standard models, both effects exactly cancel each other Fourth ECINEQ Meeting, Catania, July 18-20 2011

  18. Results-3 • In my model this change raises the “visible” part of contributions: the (negative) effect on supply is of smaller size than the (positive) effect on demand • Overall, the effect on employment is positive • Another implication is that policy changes that increase visibility of contributions have always a positive effect on employment Fourth ECINEQ Meeting, Catania, July 18-20 2011

  19. Analysis • Total labor cost for firms is w(1+F) where F is firms contribution rate • Labor demand is D(w(1+F)), with D’ < 0 • In standard analysis, labor supply is S(w(1- W)), where W is worker’s contribution rate, with S’ > 0 • We call  = F + W Fourth ECINEQ Meeting, Catania, July 18-20 2011

  20. Analysis-2 • I assume that labor supply is S(w), where:  = 1- W + (W+F) • The parameter   0 captures the strength of the linkage workers perceive between current contributions and future benefits • In standard analysis,  = 0 (contributions are perceived as pure taxes) Fourth ECINEQ Meeting, Catania, July 18-20 2011

  21. Analysis-3 • If  > 0, contributions are not perceived as pure taxes • Different individuals may have different values of . This will depend on particular details of the pension system • For instance, if the system is progressive low-skilled workers may have higher values of  than high-skilled workers Fourth ECINEQ Meeting, Catania, July 18-20 2011

  22. Analysis-4 • Recall that supply is S(w), with:  = 1- W + (W+F) • The parameter   [0,1] represents how “visible” are contributions paid by employers • If  = 0 they are not visible at all • Workers take into account only contributions paid by themselves Fourth ECINEQ Meeting, Catania, July 18-20 2011

  23. Analysis-5 • If  = 1, contributions paid by firms are equally visible than those paid by workers themselves • If 0 <  < 1, contributions paid by firms are less visible for workers than those paid by themselves Fourth ECINEQ Meeting, Catania, July 18-20 2011

  24. Analysis-6 • I analyze the effect of changes in F and W on employment (L) • To do this, I compute dlnL/dF and dlnL/dW. Both are negative • However, the size of dlnL/dF is larger than the one of dlnL/dW as long as: Fourth ECINEQ Meeting, Catania, July 18-20 2011

  25. Condition • This condition says that must be high enough and  must be low enough • In particular, I need: •  < 1 •  > /(1+) • If either 1 or 2 fails, the condition does not hold Fourth ECINEQ Meeting, Catania, July 18-20 2011

  26. Condition-2 • Consider  = 20% (then  > 1/6) • If  = 0.25, the condition is  < 0.4 • If  = 0.5, the condition is  < 0.8 • If  = 0.75, the condition is  < 0.93 • If  = 1, the condition is  < 1 • With a progressive system, the condition is more likely to hold for low-skilled workers (high  and low ) Fourth ECINEQ Meeting, Catania, July 18-20 2011

  27. Changing the Split • Next I consider a policy change such that dF = -dW < 0 (a “small” change) • Total contributions  remain unchanged • Under the above condition, this change always has a positive effect on employment • It also reduces total labor costs for firms Fourth ECINEQ Meeting, Catania, July 18-20 2011

  28. Policy change S(w) S(w) wF ww D(w) D(w(1+F)) Fourth ECINEQ Meeting, Catania, July 18-20 2011

  29. Policy change-2 S(’w) S(w) S(w) wF wF’ ww’ ww D(w) D(w(1+F)) D(w(1+F’)) Fourth ECINEQ Meeting, Catania, July 18-20 2011

  30. Increasing visibility • Government could require firms to provide detailed information about contributions • “42. Taxes should be made as visible as possible; (…) the gross wage, including payroll taxes, should be reported along with the wage payment.” TURNING SWEDEN AROUND, Lindbeck et al. (1994) Fourth ECINEQ Meeting, Catania, July 18-20 2011

  31. Increasing visibility-2 • In Spain, for example, this information IS NOT in the monthly wage statement • Not to say about civil servants • Quite difficult to find information on contributions • As long as  > 0, the above policy has always a positive effect on employment • It also reduces labor costs Fourth ECINEQ Meeting, Catania, July 18-20 2011

  32. Increasing visibility S(w) S(w) wF ww D(w) D(w(1+F)) L Fourth ECINEQ Meeting, Catania, July 18-20 2011

  33. Increasing visibility S(’w) S(w) S(w) wF wF’ ww’ ww D(w) D(w(1+F)) L L’ Fourth ECINEQ Meeting, Catania, July 18-20 2011

  34. Empirical evidence • Data on 30 OECD countries • They include: • Employer and employee contribution (% of wages) • Income tax, total tax wage • Net replacement rates (pension/wages) • EPL • Employment: total and by gender Fourth ECINEQ Meeting, Catania, July 18-20 2011

  35. Summary Statistics Fourth ECINEQ Meeting, Catania, July 18-20 2011

  36. Cross Country Regressions ***Significant at 1%; *Significant at 10% Fourth ECINEQ Meeting, Catania, July 18-20 2011

  37. Interpretation • A reduction of one point in employers contribution raises male employment by (aprox.) 0.65% • Changes in employees contributions have no effect • Problem: We do not have information on “visibility” Fourth ECINEQ Meeting, Catania, July 18-20 2011

  38. Conclusions • How workers perceive contributions paid by firms affects incidence analysis • If they are less “visible” than contributions paid by workers, their (negative) effect on employment is stronger • Making more “visible” employers’ contributions is always positive for employment and has little cost Fourth ECINEQ Meeting, Catania, July 18-20 2011

More Related