Public finance solutions to the European unemployment problem?

Summary Public finance solutions A tax shift away from low-paid labour may fight unemploymentUnemployment in Europe is heavily concentrated among low-skilled workers. It has therefore been suggested that structural unemployment could be reduced by shifting the tax burden away from low-skilled labour and away from the production of consumer services, which are intensive in the use of such labour. This paper finds that a tax shift away from low-paid labour may raise aggregate employment and welfare, but only if wage formation is sufficiently responsive to changing tax incentives. The analysis also suggests that non-negligible employment and welfare gains could be reaped by offering tax concessions or subsidies to those parts of the consumer service sector which compete most directly with low-productivity home production and with underground economic activity.— Peter Birch Sørensen