Reducing social contributions on unskilled labour as a way of fighting unemployment: an empirical evaluation for the case of Spain

Abstract

In this paper we provide an empirical evaluation of the effects of a cut in social security contributions (i) for all types of labour, and (ii) only for unskilled labour, within a computable general equilibrium model simulated for the Spanish economy. The model allows firms to follow a non-competitive price rule, and incorporates an equal yield assumption, which means that the reduction in social security contributions is compensated with an increase in value-added tax rates, so that the public sector deficit is not affected. In addition, the labour market is assumed to follow a matching unemployment rule, which allows to model in a simple way any frictions present in that market.