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Unemployment versus In-work Benefits with Search Unemployment and Observable Abilities

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Listed:
  • Bovenberg, Lans
  • Boone, Jan

Abstract

This Paper explores the optimal interaction between the tax system and unemployment compensation in insuring people against the risks of involuntary unemployment and low ability. To that end, we introduce search unemployment in a model of optimal non-linear income taxation. We find that the optimal search subsidy (i.e. the difference between the in-work benefit and the unemployment benefit) increases if, for efficient agents, the participation constraint (governing job search) becomes relatively more important than the incentive compatibility constraint (determining hours worked). The relation between unemployment benefits and the optimal level of in-work benefits (the number of people exerting positive work effort) is U (inversely U) shaped.

Suggested Citation

  • Bovenberg, Lans & Boone, Jan, 2001. "Unemployment versus In-work Benefits with Search Unemployment and Observable Abilities," CEPR Discussion Papers 3043, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3043
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    Citations

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    Cited by:

    1. Boone, J. & Bovenberg, A.L., 2002. "The Optimal Taxation of Unskilled Labor with Job Search and Social Assistance," Other publications TiSEM b9750cea-4658-411f-be03-7, Tilburg University, School of Economics and Management.
    2. Boone, Jan & Bovenberg, Lans, 2004. "The optimal taxation of unskilled labor with job search and social assistance," Journal of Public Economics, Elsevier, vol. 88(11), pages 2227-2258, September.
    3. Jan Boone & Lans Bovenberg, 2007. "The Simple Economics of Bunching: Optimal Taxation with Quasi‐Linear Preferences," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(1), pages 89-105, February.

    More about this item

    Keywords

    Search; In-work tax benefits; Unemployment compensation;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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