We develop a theoretical framework to evaluate the contribution of different payroll tax schedules to business cycle fluctuations. We build and estimate a dynamic model of the labor market with search frictions, heterogeneous workers, an aggregate TFP shock and a non-linear payroll tax schedule.

We estimate the model using Italian administrative data for the period 1977-2012 and use our estimated framework to quantitatively evaluate how different payroll tax schedules can amplify business cycle shocks for different types of workers.

This is a joint project with Nicolò Dalvit.