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Labor tax reform and equilibrium unemployment : a search and matching approach

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Author Info
Heijdra, B.J.
Ligthart, J.E. (Tilburg University, Center for Economic Research)

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Abstract

The paper studies simple strategies of labor tax reform in a search and matching model of the labor market featuring endogenous labor supply. Changing the composition of the tax wedge|that is, reducing a payroll tax and increasing a progressive wage tax such that the marginal tax wedge remains unaffected|increases employment, reduces the equilibrium unemployment rate, and increases public revenue as long as workers do not have all the bargaining power in wage negotiations. A strategy of replacing employment taxes by payroll taxes increases employment and reduces the equilibrium unemployment rate, while the effect on public revenue is ambiguous.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 89.

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Date of creation: 2004
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Handle: RePEc:dgr:kubcen:200489

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Find related papers by JEL classification:
J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
J68 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Public Policy

References listed on IDEAS
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. Pisauro, Giuseppe, 1991. "The effect of taxes on labour in efficiency wage models," Journal of Public Economics, Elsevier, vol. 46(3), pages 329-345, December. [Downloadable!] (restricted)
  2. Rasmussen, Bo Sandemann, 1998. "Long run effects of employment and payroll taxes in an efficiency wage model," Economics Letters, Elsevier, vol. 58(2), pages 245-253, February. [Downloadable!] (restricted)
  3. Picard, Pierre M & Toulemonde, Eric, 2001. "On the Equivalence of Taxes Paid by Employers and Employees," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(4), pages 461-70, September. [Downloadable!] (restricted)
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  4. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January. [Downloadable!] (restricted)
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  5. Mortensen, Dale T & Pissarides, Christopher, 2001. "Taxes, Subsidies and Equilibrium Labour Market Outcomes," CEPR Discussion Papers 2989, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June. [Downloadable!] (restricted)
  7. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 57(2), pages 279-98, April. [Downloadable!] (restricted)
  8. Koskela, Erkki & Schob, Ronnie, 1999. "Does the composition of wage and payroll taxes matter under Nash bargaining?," Economics Letters, Elsevier, vol. 64(3), pages 343-349, September. [Downloadable!] (restricted)
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  9. Holm, Pasi & Honkapohja, Seppo & Koskela, Erkki, 1994. "A monopoly-union model of wage determination with capital and taxes: An empirical application to the Finnish manufacturing," European Economic Review, Elsevier, vol. 38(2), pages 285-303, February. [Downloadable!] (restricted)
  10. Shi, Shouyong & Wen, Quan, 1999. "Labor market search and the dynamic effects of taxes and subsidies," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 457-495, April. [Downloadable!] (restricted)
  11. Koskela, Erkki & Vilmunen, Jouko, 1996. "Tax progression is good for employment in popular models of trade union behaviour," Labour Economics, Elsevier, vol. 3(1), pages 65-80, August. [Downloadable!] (restricted)
  12. Boone, Jan & Bovenberg, A Lans, 2001. "Optimal Labour Taxation and Search," CEPR Discussion Papers 3002, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Summers, Lawrence H, 1989. "Some Simple Economics of Mandated Benefits," American Economic Review, American Economic Association, vol. 79(2), pages 177-83, May. [Downloadable!] (restricted)
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Cited by:
(explanations, 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. Erkki Koskela & Ronnie Schöb, 2007. "How Tax Progression Affects Effort and Employment," IZA Discussion Papers 2861, Institute for the Study of Labor (IZA). [Downloadable!]
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