The Long and the Short Runs
By David Henderson
After noting how high payroll tax rates are in Europe, Arnold Kling comments:
I had not realized that these tax rates are so high. I find it hard to reconcile Germany’s relatively low unemployment rate with this high payroll tax rate.
I don’t find it hard to reconcile the two. The reason: Germany has had high payroll tax rates for a long time–for decades, actually. So real wages have had a long time to adjust.
If the government raises the payroll tax by a large percentage in a short time, then expect a big increase in the unemployment rate as employers lay people off and slow down hiring. But don’t expect that increase in unemployment to persist for decades.
Note that this is separate from the issue of employment rates. The long-run supply of labor is probably upward-sloping. So, all other things equal, one would expect lower employment rates in those European countries than here.