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Financing Unemployment Benefits: Dismissal versus Employment Taxes

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  • Florian Baumann
  • Nikolai Stähler

Abstract

This paper investigates the effects of using dismissal taxes to finance unemployment benefits. We compare dismissal and employment taxes in a model with search frictions. Employment taxes give rise to externalities because firms do not take into account the effects their dismissal decisions have on others. These externalities can be tackled by using dismissal taxes to finance unemployment insurance. Taking into account the budget for unemployment insurance, employment taxes can be reduced by more than is necessary to offset the adverse effect of dismissal taxes on the value of the firm. The introduction of dismissal taxes leads to higher job creation and lower unemployment. Copyright 2006 The Authors; Journal compilation 2006 CEIS, Fondazione Giacomo Brodolini and Blackwell Publishing Ltd..

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Bibliographic Info

Article provided by CEIS in its journal LABOUR.

Volume (Year): 20 (2006)
Issue (Month): 3 (09)
Pages: 433-451

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Handle: RePEc:bla:labour:v:20:y:2006:i:3:p:433-451

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  1. Belot, Michèle & Boone, Jan & van Ours, Jan C, 2002. "Welfare Effects of Employment Protection," CEPR Discussion Papers 3396, C.E.P.R. Discussion Papers.
  2. Guillaume Rocheteau, 1999. "Can an Unemployment Insurance System Generate Multiple Natural Rates?," International Tax and Public Finance, Springer, vol. 6(3), pages 379-387, August.
  3. Bovenberg, A.L., 2003. "Tax Policy and Labor Market Performance," Discussion Paper 2003-90, Tilburg University, Center for Economic Research.
  4. Mortensen, Dale T & Pissarides, Christopher, 1999. "New Developments in Models of Search in the Labour Market," CEPR Discussion Papers 2053, C.E.P.R. Discussion Papers.
  5. Dale T. Mortensen & Christopher A. Pissarides, 2002. "Taxes, Subsidies and Equilibrium Labor Market Outcomes," CEP Discussion Papers dp0519, Centre for Economic Performance, LSE.
  6. Garibaldi, Pietro, 1998. "Job flow dynamics and firing restrictions," European Economic Review, Elsevier, vol. 42(2), pages 245-275, February.
  7. Rocheteau, Guillaume, 1999. "Balanced-Budget Rules and Indeterminacy of the Equilibrium Unemployment Rate," Oxford Economic Papers, Oxford University Press, vol. 51(3), pages 399-409, July.
  8. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  9. Anderson, Patricia M. & Meyer, Bruce D., 2000. "The effects of the unemployment insurance payroll tax on wages, employment, claims and denials," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 81-106, October.
  10. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
  11. Bertola, Giuseppe, 1999. "Microeconomic perspectives on aggregate labor markets," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 45, pages 2985-3028 Elsevier.
  12. Olivier Blanchard & Jean Tirole, 2004. "The Optimal Design of Unemployment Insurance and Employment Protection. A First Pass," NBER Working Papers 10443, National Bureau of Economic Research, Inc.
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Cited by:
  1. Robalino, David & Vodopivec, Milan & Bodor, Andras, 2009. "Savings for unemployment in good or bad times : options for developing countries," Social Protection Discussion Papers 50320, The World Bank.

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