Social Security Contributions and Efficiency Wage Theory: Incidence and Effects on Employment
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Social security contributions constitute one of the most important sources of revenue in Western industrialized countries. In the EEC, they equal about 11% of GDP and 30% of total tax revenues. However, these average figures tend to hide important differences and changes, across countries and over time. Table 1 shows trends in social security contributions in EEC countries for the last quarter of a century. Considering 1989, social security contributions as a ratio to GDP vary between 1.5% in Denmark and 20% in France, while their proportion of total tax revenues ranges from 3% to 45.8% in the same two countries, respectively. In the case of Italy, reliance on social security contributions is just above average, though significandy lower than in France and Germany — Italy’s main trading partners in Europe. Nevertheless, if one considers the legal incidence of compulsory contributions in manufacturing, i.e. the sector which is most exposed to international competition, the picture changes remarkably. This is highlighted by the data in table 2, which shows the ratio of total (employer’s and employee’s) social security contributions to the earnings of an “average production worker”. From this point of view, contribution incidence in Italy appears significantly higher than elsewhere.
KeywordsWage Premium Social Security Contribution Efficiency Wage Effort Supply Employment Subsidy
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