IDEAS home Printed from https://ideas.repec.org/p/cep/cepdps/dp0361.html

The Impact of Employment Tax Cuts on Unemployment and Wages: The Role of Unemployment Benefits and Tax Structure

Author

Listed:
  • Christopher A. Pissarides

Abstract

I model and simulate the effects of employment tax cuts on unemployment and wages in four equilibrium models: competitive, union bargaining, search and efficiency wages. I find that if the ratio of unemployment compensation to wages is fixed, the effect of the tax cut is mainly on wages. But if income out of work is fixed in real terms, there are substantial employment effects. When wages are determined by bargaining, revenue-neutral reforms that make the tax more progressive also reduce unemployment. Thus, policy towards unemployment compensation and tax structure are key influences on the effect of taxes on unemployment.

Suggested Citation

  • Christopher A. Pissarides, 1997. "The Impact of Employment Tax Cuts on Unemployment and Wages: The Role of Unemployment Benefits and Tax Structure," CEP Discussion Papers dp0361, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp0361
    as

    Download full text from publisher

    File URL: https://cep.lse.ac.uk/pubs/download/DP0361.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Holmlund, B. & Kolm, A.S., 1995. "Progressive Taxation, Wage Setting, and Unemployment , Theory and Swedish Evidence," Papers 1995-15, Uppsala - Working Paper Series.
    2. Dertouzos, James N & Pencavel, John H, 1981. "Wage and Employment Determination under Trade Unionism: The International Typographical Union," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1162-1181, December.
    3. James N. Dertouzos & John H. Pencavel, 1980. "Wage and Employment Determinants under Trade Unionism: The InternationalTypographical Union," NBER Working Papers 0570, National Bureau of Economic Research, Inc.
    4. Ben Lockwood & Alan Manning, 1993. "Wage Setting and the Tax System: theory and Evidence for the UK," CEP Discussion Papers dp0115, Centre for Economic Performance, LSE.
    5. repec:bla:econom:v:49:y:1982:i:195:p:219-39 is not listed on IDEAS
    6. Bovenberg, A.L. & van der Ploeg, F., 1994. "Consequences of environmental tax reform for involuntary unemployment and welfare," Other publications TiSEM 39a30049-14fe-4ca3-b361-0, Tilburg University, School of Economics and Management.
    7. Timo Tyrväinen, 1995. "Real Wage Resistance and Unemployment: Multivariate Analysis of Cointegrating Relations in 10 OECD Countries," OECD Jobs Study Working Papers 10, OECD Publishing.
    8. Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204, Elsevier.
    9. Nickell, S J & Andrews, M, 1983. "Unions, Real Wages and Employment in Britain 1951-79," Oxford Economic Papers, Oxford University Press, vol. 35(0), pages 183-206, Supplemen.
    10. A. Zabalza & C. Pissarides & M. Barton, 1980. "Social Security and the Choice between Full-time Work, Part-time Work and Retirement," NBER Chapters, in: Econometric Studies in Public Finance, pages 245-276, National Bureau of Economic Research, Inc.
    11. Layard, R. & Nickell, S., 1991. "Unemployment in the OECD Countries," Economics Series Working Papers 99130, University of Oxford, Department of Economics.
    12. Pencavel, John, 1987. "Labor supply of men: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 1, pages 3-102, Elsevier.
    13. Steven J. Davis & John Haltiwanger, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 819-863.
    14. Tyrväinen, Timo, 1995. "Wage determination in the long run, real wage resistance and unemployment : Multivariate analysis of cointegrating relations in 10 OECD economies," Research Discussion Papers 12/1995, Bank of Finland.
    15. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
    16. Oswald, Andrew J, 1982. "The Microeconomic Theory of the Trade Union," Economic Journal, Royal Economic Society, vol. 92(367), pages 576-595, September.
    17. 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.
    18. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December.
    19. Dale T. Mortensen & Christopher A. Pissarides, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(3), pages 397-415.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Knut Røed & Steinar Strøm, 2002. "Progressive Taxes and the Labour Market: Is the Trade–off Between Equality and Efficiency Inevitable?," Journal of Economic Surveys, Wiley Blackwell, vol. 16(1), pages 77-110, February.
    2. Goerke, Laszlo & Madsen, Jakob B., 2003. "Earnings-Related Unemployment Benefits in a Unionised Economy," IZA Discussion Papers 701, Institute of Labor Economics (IZA).
    3. Pekka Sinko, 2007. "Labour taxation, job creation and job destruction—Focusing on the role of wage setting," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(5), pages 583-604, October.
    4. Mattesini, Fabrizio & Rossi, Lorenza, 2009. "Optimal monetary policy in economies with dual labor markets," Journal of Economic Dynamics and Control, Elsevier, vol. 33(7), pages 1469-1489, July.
    5. Carlsson, Mikael & Eriksson, Stefan & Gottfries, Nils, 2006. "Testing Theories of Job Creation: Does Supply Create Its Own Demand?," Working Paper Series 194, Sveriges Riksbank (Central Bank of Sweden).
    6. Turon, Helene & Simon Burgess, 2003. "Unemployment equilibrium and on-the-job search," Royal Economic Society Annual Conference 2003 208, Royal Economic Society.
    7. Giovanni Gallipoli & Gianluigi Pelloni, 2013. "Macroeconomic Effects of Job Reallocations: A Survey," Review of Economic Analysis, Digital Initiatives at the University of Waterloo Library, vol. 5(2), pages 127-176, December.
    8. Costain, James S. & Reiter, Michael, 2008. "Business cycles, unemployment insurance, and the calibration of matching models," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1120-1155, April.
    9. Osberg, Lars, 1995. "The Missing Link - Data on the Demand Side of Labour Markets," Analytical Studies Branch Research Paper Series 1995077e, Statistics Canada, Analytical Studies Branch.
    10. Bingley, Paul & Lanot, Gauthier, 2002. "The incidence of income tax on wages and labour supply," Journal of Public Economics, Elsevier, vol. 83(2), pages 173-194, February.
    11. James M. Malcomson & Sophocles Mavroeidis, 2007. "Matching Frictions, Efficiency Wages, and Unemployment in the USA and the UK," Working Papers 2007-02, Brown University, Department of Economics.
    12. Ravi Balakrishnan, 2001. "The interaction of firing costs and on-the-job search: an application of a search theoretic model to the Spanish labour market," Working Papers 0102, Banco de España.
    13. Chang, Yongsung & Nam, Jaeryang & Rhee, Changyong, 2004. "Trends in unemployment rates in Korea: A search-matching model interpretation," Journal of the Japanese and International Economies, Elsevier, vol. 18(2), pages 241-263, June.
    14. Ramey, Valerie A & SHAPIRO, MATTHEW D, 1998. "Displaced Capital," University of California at San Diego, Economics Working Paper Series qt49k7n14z, Department of Economics, UC San Diego.
    15. Kremer, Jana, 1999. "Arbeitslosigkeit und Steuerpolitik," BERG Working Paper Series 32, Bamberg University, Bamberg Economic Research Group.
    16. Kjell Erik Lommerud & Bjørn Sandvik & Odd Rune Straume, 2004. "Good Jobs, Bad Jobs and Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 703-720, December.
    17. Jorge Andr�s Tamayo Casta�o, 2012. "Asimetr�as en la demanda por trabajo en Colombia: el papel del ciclo econ�mico," Borradores de Economia 9286, Banco de la Republica.
    18. Pisauro, Giuseppe, 2002. "The beneficial effects of generous unemployment benefits on profits and employment," European Journal of Political Economy, Elsevier, vol. 18(4), pages 739-760, November.
    19. Giorgio Fagiolo & Giovanni Dosi & Roberto Gabriele, 2005. "Towards an evolutionary interpretation of aggregate labor market regularities," Springer Books, in: Uwe Cantner & Elias Dinopoulos & Robert F. Lanzillotti (ed.), Entrepreneurships, the New Economy and Public Policy, pages 223-252, Springer.
    20. Kenneth Beauchemin & Murat Tasci, 2005. "On the Cyclicality of Labor Market Mismatch and Aggregate Employment Flows," Discussion Papers 05-01, University at Albany, SUNY, Department of Economics.

    More about this item

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cep:cepdps:dp0361. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://cep.lse.ac.uk/_new/publications/discussion-papers/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.