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Employment Subsidy with Capital Mobility

Author

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  • Manuel Leite–Monteiro
  • Maurice Marchand
  • Pierre Pestieau

Abstract

Most models of tax competition assume full employment. Yet, actually one often observes that fiscal competition, particularly when it is aimed at attracting investment, is motivated by the concern of fighting unemployment and enhancing job creation. The present paper considers a multicountry model with capital mobility and unemployment. Fiscal policy has two opposing objectives: financing unemployment insurance and increasing employment. In each country there is a majority vote on this policy. The purpose of the paper is to analyse how opening borders to capital flows modifies the median voter's choice of the employment subsidy. Assuming that capital and labour are complements, economic integration is shown to raise the employment subsidy with fixed wages. This agrees with intuition as a larger employment subsidy attracts more capital. However, when wages are set by labour unions economic integration can change the median voter's choice in either direction.

Suggested Citation

  • Manuel Leite–Monteiro & Maurice Marchand & Pierre Pestieau, 2003. "Employment Subsidy with Capital Mobility," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 327-344, April.
  • Handle: RePEc:bla:jpbect:v:5:y:2003:i:2:p:327-344
    DOI: 10.1111/1467-9779.00135
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    Cited by:

    1. Rüdiger Pethig & Frieder Kolleß, 2009. "Asymmetric capital-tax competition, unemployment and losses from capital market integration," MAGKS Papers on Economics 200940, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    2. Nelly Exbrayat & Carl Gaigné & Stéphane Riou, 2012. "The effects of labour unions on international capital tax competition," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 45(4), pages 1480-1503, November.
    3. Nelly Exbrayat & Carl Gaigné & Stéphane Riou, 2010. "How labor market rigidities shape business taxation in a global economy?," Post-Print halshs-00537021, HAL.
    4. Hikaru Ogawa & Yasuhiro Sato & Toshiki Tamai, 2016. "Who gains from capital market integration? Tax competition between unionized and non‐unionized countries," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 49(1), pages 76-110, February.
    5. Holger Gillet & Johannes Pauser, 2018. "Public Input Provision in Asymmetric Regions with Labor Market Imperfections," German Economic Review, Verein für Socialpolitik, vol. 19(4), pages 466-492, November.
    6. Yasuhiro Sato, 2009. "Capital tax competition and search unemployment," Papers in Regional Science, Wiley Blackwell, vol. 88(4), pages 749-764, November.
    7. Pauser, Johannes, 2013. "Capital mobility, imperfect labour markets, and the provision of public goods," IAB Discussion Paper 201309, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    8. Gillet, Holger & Pauser, Johannes, 2014. "Efficiency in public input provision in two asymmetric jurisdictions with imperfect labour markets," IAB Discussion Paper 201411, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    9. Clemens Fuest & Bernd Huber & Jack Mintz, 2003. "Capital Mobility and Tax Competition: A Survey," CESifo Working Paper Series 956, CESifo.
    10. Yoshitomo Ogawa & Yoshiyasu Ono, 2016. "The Welfare Effects of Attracting Foreign Direct Investment in the Presence of Unemployment," ISER Discussion Paper 0959, Institute of Social and Economic Research, Osaka University.
    11. Ogawa, Hikaru & Sato, Yasuhiro & Tamai, Toshiki, 2006. "A note on unemployment and capital tax competition," Journal of Urban Economics, Elsevier, vol. 60(2), pages 350-356, September.

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