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Shocks and the Unavoidable Road to Higher Taxes and Higher Unemployment

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Author Info
Wouter Denhaan (University of Amsterdam)

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Abstract

This paper considers a matching model in which multiple steady-state unemployment rates exist if government expenditures and unemployment benefits are high enough. The focus on the extensive margin and a possible transition to a steady state with higher unemployment rates imply that the effect of tax rates can be high even when the elasticity between consumption and leisure is low. The matching friction limits transitions between steady states due to self-fulfilling expectations. After a sufficiently large increase in the unemployment rate and after a large enough increase in the tax burden caused by an exogenous increase in government spending, however, transition towards the high-unemployment steady state is unavoidable in an economy with generous unemployment benefits. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2006.11.002
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 10 (2007)
Issue (Month): 3 (July)
Pages: 348-366
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Handle: RePEc:red:issued:06-7

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Related research
Keywords: Multiple equilibria; Matching friction; Unemployment benefits; Fiscal policy;

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Find related papers by JEL classification:
C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium
D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

References listed on IDEAS
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  1. Saint-Paul, Gilles, 1995. "The High Unemployment Trap," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 527-50, May. [Downloadable!] (restricted)
    Other versions:
  2. Richard Rogerson, 2006. "Understanding Differences in Hours Worked," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(3), pages 365-409, July. [Downloadable!] (restricted)
  3. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR, CES, MSH, vol. 15(30), pages 47-104, 04. [Downloadable!] (restricted)
    Other versions:
  4. Francois Gourio & Pierre-Alexandre Noual, 2006. "The Marginal Worker and the Aggregate Elasticity of Labor Supply," 2006 Meeting Papers 509, Society for Economic Dynamics. [Downloadable!]
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  5. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October. [Downloadable!] (restricted)
    Other versions:
  6. Steve Nickell & Jan van Ours, 2000. "The Netherlands and the United Kingdom: a European unemployment miracle?," Economic Policy, CEPR, CES, MSH, vol. 15(30), pages 135-180, 04. [Downloadable!] (restricted)
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  7. Edward C. Prescott, 2003. "Why do Americans work so much more than Europeans?," Staff Report 321, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  8. Richard Disney, 2000. "The Impact of Tax and Welfare Policies on Employment and Unemployment in OECD Countries," IMF Working Papers 00/164, International Monetary Fund.
  9. Krugman, Paul, 1991. "History versus Expectations," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 651-67, May. [Downloadable!] (restricted)
  10. Salvador Ortigueira, 2003. "Unemployment Benefits and the Persistence of European Unemployment," Computing in Economics and Finance 2003 27, Society for Computational Economics.
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  11. Yongsung Chang & Sun-Bin Kim, 2003. "From individual to aggregate labor supply : a quantitative analysis based on a heterogeneous agent macroeconomy," Working Paper 03-05, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
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