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Tax Reform and the Dutch Labor Market: An Applied General Equilibrium Approach

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Author Info
A. Lans Bovenberg
Johan J. Graafland
Ruud A. de Mooij

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Abstract

This paper employs MIMIC, an applied general equilibrium model of the Dutch economy, to explore various tax cuts aimed at combating unemployment and raising labor supply. MIMIC combines modern labor-market theories, a firm empirical foundation detailed description of Dutch labor-market institutions. We develop a small aggregate model which contains the core of MIMIC, namely wage setting, job matching, labor supply demand. In addition to illustrating the main economic mechanisms in MIMIC shows the advantages of employing a larger, more disaggregated model that accounts for heterogeneity, institutional details, and more economic mechanisms. Targeting in-work benefits at the low skilled is the most effective way to cut economy-wide unemployment quality and quantity of labor supply. Cuts in social security contributions paid by employers and subsidies for hiring long-term unemployed reduce unskilled unemployment most substantially. Tax cuts in the higher tax brackets boost the quantity and quality of formal labor supply but are less effective in reducing unemployment and in raising unskilled employment and female labor supply.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6693.

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Date of creation: Aug 1998
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Handle: RePEc:nbr:nberwo:6693

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Find related papers by JEL classification:
D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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  1. Theeuwes, J. & Koopmans, C. C. & Van Opstal, R. & Van Reijn, H., 1985. "Estimation of optimal human capital accumulation parameters for The Netherlands," European Economic Review, Elsevier, vol. 29(2), pages 233-257. [Downloadable!] (restricted)
  2. Robert Haveman, 1995. "Reducing Poverty while Increasing Employment: A Primer on Alternative Strategies, and a Blueprint," OECD Jobs Study Working Papers 7, OECD, Directorate for Employment, Labour and Social Affairs. [Downloadable!]
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