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Labor Taxation in Search Equilibrium with Home Production

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  • Bertil Holmlund

Abstract

Conventional models of equilibrium unemployment typically imply that proportional taxes on labor earnings are neutral with respect to unemployment as long as the tax does not affect the replacement rate provided by unemployment insurance, i.e. unemployment benefits relative to after–tax earnings. When home production is an option, the conventional results may no longer hold. This paper uses a search equilibrium model with home production to examine the employment and welfare implications of labor taxes. The employment effect of a rise in a proportional tax is found to be negative for sufficiently low replacement rates, whereas it is ambiguous for moderate and high replacement rates. Numerical calibrations of the model indicate that employment generally falls when labor taxes are raised.

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  • Bertil Holmlund, 2002. "Labor Taxation in Search Equilibrium with Home Production," German Economic Review, Verein für Socialpolitik, vol. 3(4), pages 415-430, November.
    • Handle: RePEc:bla:germec:v:3:y:2002:i:4:p:415-430
    DOI: 10.1111/1468-0475.00066
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    Cited by:

    1. Jan Boone & Peter Fredriksson & Bertil Holmlund & Jan C. van Ours, 2007. "Optimal Unemployment Insurance with Monitoring and Sanctions," Economic Journal, Royal Economic Society, vol. 117(518), pages 399-421, March.
    2. Engstrom, P. & Holmlund, B. & Kolm, A.-S., 2001. "Optimal Taxation in Search Equilibrium with Home Production," Papers 2001:19, Uppsala - Working Paper Series.
    3. Gabriele Cardullo & Bruno Van der Linden, 2007. "Employment Subsidies and Substitutable Skills: An Equilibrium Matching Approach," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 53(4), pages 375-404.
    4. Bovenberg, A.L., 2003. "Tax Policy and Labor Market Performance," Discussion Paper 2003-90, Tilburg University, Center for Economic Research.
    5. repec:spo:wpecon:info:hdl:2441/8921 is not listed on IDEAS
    6. Alexis, PARMENTIER, 2006. "The effects of the marginal tax rate in a matching model with endogenous labor supply," Discussion Papers (ECON - Département des Sciences Economiques) 2006011, Université catholique de Louvain, Département des Sciences Economiques.
    7. Pietro Garibaldi & Etienne Wasmer, 2005. "Equilibrium Search Unemployment, Endogenous Participation, And Labor Market Flows," Journal of the European Economic Association, MIT Press, vol. 3(4), pages 851-882, June.
    8. Engström, Per, 2002. "Optimal Non-Linear Income Taxation in Search Equilibrium," Working Paper Series 2002:18, Uppsala University, Department of Economics.
    9. Lutz, Stefan & Turrini, Alessandro, 2006. "A general equilibrium model with vertically differentiated industries, skilled labour and trade," Economic Modelling, Elsevier, vol. 23(1), pages 1-19, January.
    10. Nordström Skans, Oskar, 2001. "The effects of working time reductions on wages, actual hours and equilibrium unemployment," Working Paper Series 2001:8, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    11. repec:hal:spmain:info:hdl:2441/8921 is not listed on IDEAS
    12. Per Engström & Bertil Holmlund, 2007. "Worker Absenteeism in Search Equilibrium," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(3), pages 439-467, September.
    13. repec:spo:wpmain:info:hdl:2441/8921 is not listed on IDEAS
    14. Dan Anderberg, 2003. "Insiders, Outsiders, and the Underground Economy," CESifo Working Paper Series 1048, CESifo.
    15. Kotamäki Mauri, 2017. "Laffer Curves and Home Production," Nordic Tax Journal, Sciendo, vol. 2017(1), pages 59-69, January.
    16. Bruno Van der Linden & Eric Dor, 2003. "The net effect of unemployment benefits, sanctions and training on regular employment," Working Papers 2003-ECO-01, IESEG School of Management.
    17. repec:hal:wpspec:info:hdl:2441/8921 is not listed on IDEAS
    18. Abou Kane, 2014. "Analysis of Labour Market Participation in Senegal," Post-Print hal-01929090, HAL.
    19. Van der Linden, Bruno & Dor, Eric, 1998. "The net effect of unemployment benefits, sanctions and training on aggregate unemployment outflows," LIDAM Discussion Papers IRES 2000020, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 07 Sep 2000.
    20. Pietro Garibaldi & Etienne Wasmer, 2005. "Equilibrium Search Unemployment, Endogenous Participation and Labor Market Flows," SciencePo Working papers hal-01020784, HAL.
    21. Bovenberg, A.L., 2003. "Tax Policy and Labor Market Performance," Other publications TiSEM 68fd52eb-a6d6-4300-8636-c, Tilburg University, School of Economics and Management.

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    More about this item

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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