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Public finance solutions to the European unemployment problem?

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  • P. B. Sørensen

Abstract

Unemployment in Europe is heavily concentrated among low-skilled workers. It has therefore been suggested that structural unemployment could be reduced by shifting the tax burden away from low-skilled labour and away from the production of consumer services, which are intensive in the use of such labour. This paper finds that a tax shift away from low-paid labour may raise aggregate employment and welfare, but only if wage formation is sufficiently responsive to changing tax incentives. The analysis also suggests that non-negligible employment and welfare gains could be reaped by offering tax concessions or subsidies to those parts of the consumer service sector which compete most directly with low-productivity home production and with underground economic activity. Copyright Centre for Economic Policy Research, Centre for Economic Studies, Maison des Sciences de l'Homme 1997.

Suggested Citation

  • P. B. Sørensen, 1997. "Public finance solutions to the European unemployment problem?," Economic Policy, CEPR;CES;MSH, vol. 12(25), pages 221-264, October.
  • Handle: RePEc:bla:ecpoli:v:12:y:1997:i:25:p:221-264
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