Temporary reductions in social security contributions can be used to limit the negative impact of the crisis on employment and social cohesion, especially if they are targeted at disadvantaged groups (such as the disabled, young people, ethnic minorities and the long-term unemployed) or industries (such as SME). Such measure has the potential to stimulate the economy by increasing employees’ disposable income and alleviating cost pressures for employers. The impact of such temporary measure could be strengthened if one would make it permanent and offset the budgetary effects by appropriate measures, such as increases in taxes on energy and emission of pollutants(27) - provided that the induced price increases do not trigger increases in wage claims.
Nevertheless, empirical analyses indicate that targeting specific groups of employees may have a negative effect on the employment prospects of categories that are (narrowly) ineligible, see for instance Marx (2005). Moreover, deadweight costs may arise as some individuals receive a cut in social security contributions even though they would have been hired without such a cut.
Several Member States have introduced cuts in social security contributions, directed either at the entire workforce or specific groups of workers.
In 2009, Germany reduced both employer and employee contributions to unemployment insurance on a temporary basis. In 2010, employers’ social security contributions in Hungary were permanently reduced: as of mid-2009 employers’ contributions were cut from 32% to 27 % for wages less than double the minimum wage, and this was extended to all wages at the beginning of 2010.
Several Member States have temporarily reduced social security contributions for new hires.
(27) | The Europe 2020 Integrated Guideline 1 calls for taxes that do not harm growth and employment. Where taxes may have to rise, this should, where possible, be done in conjunction with measures to make tax systems more growth-friendly by shifting the tax burden from labour to, for example, environmentally harmful activities. |