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Equilibrium Unemployment and the Finance of Unemployment Benefits

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  • Panagiotis Tsintzos

Abstract

This paper examines the impact of a tax scheme that considers a flat tax rate on employment income on equilibrium employment within a general equilibrium framework, incorporating Shapiro and Stiglitz's (1984) theory of wage rigidity. We consider taxation of wages, which are used to finance, under a government’s balanced budget regime, unemployment benefits, and analyse the effects on labour market outcomes. Our results show that the introduction of taxation on wages leads to an upward shift of the no-shirking condition (NSC) curve and a new equilibrium point at a higher level of unemployment and higher wages. The results underscore the significance of tax scheme design in shaping labour market equilibrium. These results may have a role in policy decisions aimed at promoting employment and economic growth and offer some insight for empirical studies on the estimation of the level of equilibrium unemployment.

Suggested Citation

  • Panagiotis Tsintzos, 2025. "Equilibrium Unemployment and the Finance of Unemployment Benefits," Bulletin of Applied Economics, Risk Market Journals, vol. 12(1), pages 65-74.
    • Handle: RePEc:rmk:rmkbae:v:12:y:2025:i:1:p:65-74
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    More about this item

    Keywords

    Unemployment; Wage rigidity; Taxation; Labour demand; Efficiency wage theory.;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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