This paper models two kinds of wage subsidy in a model of the natural rate having a continuum of workers ranked by their productivity - a flat wage subsidy and a graduated wage subsidy, each financed by a proportional payroll tax. In the small open economy case, with the graduation as specified, we show that both schemes expand employment throughout the distribution; for those whose productivity is sufficiently far below the mean, take-home pay is unambiguously up, though the tax financing lowers take-home pay at the mean and above.
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Paper provided by Indiana - Center for Econometric Model Research in its series Papers with number
98-004.
Length: 29 pages Date of creation: 1998 Date of revision: Handle: RePEc:fth:indian:98-004
Contact details of provider: Postal: Indiana University, Center for Econometric Model Research, Department of Economics; Bloomington, IN 47405. Phone: 812-855-1021 Fax: 812-855-3736 Email: Web page: http://www.indiana.edu/~econweb/ More information through EDIRC
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Find related papers by JEL classification: E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
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