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The Impact of Employment Tax Cuts on Unemployment and Wages: The Role of Unemployment Benefits and Tax Structure

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C Pissarides

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Abstract

I model and simulate the effects of employment tax cuts on unemployment and wages in four equilibrium models: competitive, union bargaining, search and efficiency wages. I find that if the ratio of unemployment compensation to wages is fixed, the effect of the tax cut is mainly on wages. But if income out of work is fixed in real terms, there are substantial employment effects. When wages are determined by bargaining, revenue-neutral reforms that make the tax more progressive also reduce unemployment. Thus, policy towards unemployment compensation and tax structure are key influences on the effect of taxes on unemployment.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number 0361.

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Date of creation: Aug 1997
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Handle: RePEc:cep:cepdps:0361

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Timo Tyrväinen, 1995. "Real Wage Resistance and Unemployment: Multivariate Analysis of Cointegrating Relations in 10 OECD Countries," OECD Jobs Study Working Papers 10, OECD Directorate for Employment, Labour and Social Affairs. [Downloadable!]
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  3. B Lockwood & A Manning, 1993. "Wage Setting and the Tax System: theory and Evidence for the UK," CEP Discussion Papers 0115, Centre for Economic Performance, LSE.
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  5. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December. [Downloadable!] (restricted)
  6. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 397-415, July. [Downloadable!] (restricted)
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  7. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82. [Downloadable!] (restricted)
  8. Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204 Elsevier. [Downloadable!] (restricted)
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  11. Zabalza, A. & Pissarides, C. & Barton, M., 1980. "Social security and the choice between full-time work, part-time work and retirement," Journal of Public Economics, Elsevier, vol. 14(2), pages 245-276, October. [Downloadable!] (restricted)
  12. Layard, Richard, 1982. "Is Incomes Policy the Answer to Unemployment?," Economica, London School of Economics and Political Science, vol. 49(195), pages 219-39, August. [Downloadable!] (restricted)
  13. Lans Bovenberg & Frederick van der Ploeg, 1994. "Consequences of Environmental Tax Reform for Involuntary Unemployment and Welfare," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH.
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