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Model Distraction: A Comment on Daveri and Tabellini

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  • Andrea Imperia

Abstract

An article by Francesco Daveri and Guido Tabellini (2000) combines empirics and a general-equilibrium overlapping-generations model to recommend the reduction of labor taxation and pension expenditures. I demonstrate that, in the model, unemployment would be zero if unemployment benefits remained between zero and a certain value that is dependent on the level of wage taxation. My demonstration leads to two questions: (1) Why should the government introduce unemployment benefits in an economy that otherwise would always operate at full employment? (2) Why is the reader led to believe that the reduction of labor taxation and pension expenditure are the main economic policy indications that derive from the model? Since, in the Daveri and Tabellini model, unemployment benefits are a waste of resources, the reduction of unemployment benefits is the best way to reduce unemployment.

Suggested Citation

  • Andrea Imperia, 2013. "Model Distraction: A Comment on Daveri and Tabellini," Econ Journal Watch, Econ Journal Watch, vol. 10(1), pages 15-24, January.
  • Handle: RePEc:ejw:journl:v:10:y:2013:i:1:p:15-24
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    More about this item

    Keywords

    European unemployment; unemployment benefits; wage taxation; trade unions; pension system reform;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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