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Labor tax reform and equilibrium unemployment: a search and matching approach

  • Heijdra, Ben J.
  • Ligthart, Jenny E.

    (Groningen University)

The paper studies simple strategies of labor tax reform in a search and matching model of the labor market featuring endogenous labor supply. Changing the composition of the tax wedge---that is, reducing a payroll tax and increasing a progressive wage tax such that the marginal tax wedge remains unaffected---increases employment, reduces the equilibrium unemployment rate, and increases public revenue as long as workers do not have all the bargaining power in wage negotiations. A strategy of replacing employment taxes by payroll taxes increases employment and reduces the equilibrium unemployment rate, while the effect on public revenue is ambiguous.

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File URL: http://irs.ub.rug.nl/ppn/268627444
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Paper provided by University of Groningen, CCSO Centre for Economic Research in its series CCSO Working Papers with number 200409.

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Date of creation: 2004
Date of revision:
Handle: RePEc:dgr:rugccs:200409
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