Keywords: Payroll tax, social security, tax incidence, tax salience
Abstract: Social security contributions in most countries are split between employers and employees. According to standard incidence analysis, social security contributions affect employment negatively, but it is irrelevant how they are divided between employers and employees. This paper considers the possibility that: (i) workers perceive a linkage between current contributions and future benefits and, (ii) they value employers contributions less than own contributions, as the former are less “salient.” Under these assumptions, I find that employer contributions have a stronger (negative) effect on employment than employee contributions. Furthermore, a change in how contributions are divided that reduces the share of employers is beneficial for employment. Finally, making employers contributions more visible to workers also has a positive effect on employment.