Empirical macro models under test. A comparative simulation study of the employment effects of a revenue neutral cut in social security contributions

This paper examined the employment effects of a revenue neutral cut in the social security contribution rate in Germany by running policy simulations in four different types of macroeconomic models. Two models are based on time-series data where the labor market model is basically demand oriented, whereas the other two models are supply oriented computable general equilibrium models. While the predicted employment effects of the cut in the contribution rate are qualitatively similar across models, 3 years after the cut they differ considerably in magnitude. These differences can to a large extent be attributed to differences in the basic structure of the models. Of special importance is how prices and wages react in each model to the cut in the social security tax rate on one side, and the necessary increase of the indirect tax rate on the other side. The results, therefore, provide a guideline for assessing the outcome of policy simulations and for the further development of macroeconomic models suitable for this kind of experiment.

Buscher, Herbert, Hermann Buslei, Klaus Göggelmann, Henrieke Koschel, Tobias F.N. Schmidt, Viktor Steiner and Peter Winker (2001), Empirical macro models under test. A comparative simulation study of the employment effects of a revenue neutral cut in social security contributions, Economic Modelling 18 , 455-474