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Tax Reform and the Dutch Labour Market: An Applied General Equilibrium Approach

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  • Bovenberg, A Lans
  • de Mooij, Ruud A
  • Graafland, Johan J

Abstract

This paper employs MIMIC, an applied general equilibrium model of the Dutch economy, to explore various tax cuts aimed at combating unemployment and raising labour supply. MIMIC combines modern labour-market theories, a firm empirical foundation, and a detailed description of Dutch labour-market institutions. We develop a small aggregate model, which contains the core of MIMIC, namely wage setting, job matching, labour supply and labour demand. In addition to illustrating the main economic mechanisms in MIMIC, the small model shows the advantages of employing a larger, more disaggregated model that accounts for heterogeneity, institutional details, and more economic mechanisms. Targeting in-work benefits at the low skilled is the most effective way to cut economy-wide unemployment but damages the quality and quantity of labour supply. Cuts in social security contributions paid by employers and subsidies for hiring long-term unemployed reduce unskilled unemployment most substantially. Tax cuts in the higher tax brackets boost the quantity and quality of formal labour supply but are less effective in reducing unemployment and in raising unskilled employment and female labour supply.

Suggested Citation

  • Bovenberg, A Lans & de Mooij, Ruud A & Graafland, Johan J, 1998. "Tax Reform and the Dutch Labour Market: An Applied General Equilibrium Approach," CEPR Discussion Papers 1983, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1983
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    More about this item

    Keywords

    applied general equilibrium model; Labour Supply; Structural Unemployment; tax policies; The Netherlands;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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