The effects on unemployment of reducing social security contributions: A general equilibrium analysis for Belgium

At the end of 1987, a group of Belgian economists, aiming to increase employment, suggested a move to reduce social security contributions paid by firms and to compensate the resulting loss in government income by an increase of excise and value-added tax (VAT) rates. A general equilibrium model is developed to examine the consequences of such a measure. Results include the following: 1. When the cut in social security contributions is compensated by a reduction of lump-sum transfers to Belgian households, the effect on unemployment is much greater than when the cut is financed by higher VAT rates. 2. The effects on unemployment are more important the higher the long-term rate of substitution between capital and labor. 3. Investment is crucial. 4. The welfare gains are fairly low.