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On the political economy of employment in the welfare state

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  • Thomas Cool

    (Consultancy & Econometrics)

Abstract

OECD tax policy is to have low exemption. This causes high gross minimum wages. Abolishing taxes below the gross minimum would not cost anything, since people may not work below that minimum, and thus dont earn and dont pay taxes, anyway. Present-day unemployment is inefficient, and thus there exists a Pareto improving alternative that is not exploited. For example, in Holland 25% of the labour force is on some benefit. This situation may require an abstract analysis as follows: The central questions in the political economy of employment in the welfare state are: CAN one solve unemployment, does one KNOW how, and does one WANT to? Here, a BHL-model (pronounced BEACHLY) satisfies stylized facts and serves for theoretical and empirical answers. Three types of agents give the letters BHL: Benefit recipients at social subsistence, and High and Low productivity workers. A welfare state is non-revolutionary when the BHL values are stable across regimes. The first result is a possibility theorem (CAN) that under non-revolutionarity there are two regimes of either full employment or unemployment. The second theorem explains the choice by KNOW and WANT causes. Full employment results from conscious choice or chance (while lacking knowledge). Unemployment results from from conscious choice or wrong co-ordination; in the latter case a Pareto improving change is blocked only by lack of knowledge. These theorems provide an explanation for the full employment (1950-70, Japan/Sweden) and unemployment (other) regimes. A policy conclusion is to improve informational procedures.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 9509001.

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Length: 29 pages
Date of creation: 25 Sep 1995
Date of revision: 03 Oct 1995
Handle: RePEc:wpa:wuwpma:9509001

Note: 29 pages, Word for Windows file with text, theorems and graphs
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