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Unemployment vs. In-work Benefits with Search Unemployment and Observable Abilities

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  • Boone, J.
  • Bovenberg, A.L.

    (Tilburg University, Center for Economic Research)

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.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2001-77.

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Date of creation: 2001
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Handle: RePEc:dgr:kubcen:200177

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Keywords: unemployment; taxation; redistribution; unemployment insurance;

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  1. Rochet, Jean-Charles & Stole, Lars A, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 277-311, January.
  2. BOADWAY, Robin & CUFF, Katherine & MARCHAND, Maurice, . "Optimal income taxation with quasi-linear preferences revisited," CORE Discussion Papers RP -1466, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Mathias, HUNGERBUELHER & Etienne, LEHMANN & Alexis PARMENTIER & Bruno VAN DER LINDEN, 2003. "Optimal Income Taxation in an Equilibrium Unemployment Model : Mirrlees meets Pissarides," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2003024, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  4. Boone, Jan & Bovenberg, A Lans, 2002. "The Optimal Taxation of Unskilled Labour with Job Search and Social Assistance," CEPR Discussion Papers 3446, C.E.P.R. Discussion Papers.
  5. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  6. Ebert, Udo, 1992. "A reexamination of the optimal nonlinear income tax," Journal of Public Economics, Elsevier, vol. 49(1), pages 47-73, October.
  7. Philippe Chone & Guy Laroque, 2001. "Optimal Incentives for Labor Force Participation," Working Papers 2001-26, Centre de Recherche en Economie et Statistique.
  8. Ravi Kanbur & Michael Keen & Matti Tuomala, 1990. "Optimal Non-Linear Income Taxation for the Alleviation of Income Poverty," Working Papers 799, Queen's University, Department of Economics.
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Cited by:
  1. Boone, J. & Bovenberg, A.L., 2004. "The optimal taxation of unskilled labor with job search and social assistance," Open Access publications from Tilburg University urn:nbn:nl:ui:12-140889, Tilburg University.

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