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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
    as

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    References listed on IDEAS

    as
    1. Pisauro, Giuseppe, 1991. "The effect of taxes on labour in efficiency wage models," Journal of Public Economics, Elsevier, vol. 46(3), pages 329-345, December.
    2. Olivier Blanchard & Lawrence F. Katz, 1997. "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 51-72, Winter.
    3. Olivier Blanchard, 2018. "Should We Reject the Natural Rate Hypothesis?," Journal of Economic Perspectives, American Economic Association, vol. 32(1), pages 97-120, Winter.
    4. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    5. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January.
    Full references (including those not matched with items on IDEAS)

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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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