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DO SOCIAL POLICIES HARM EMPLOYMENT? Second-best effects of taxes and benefits on labor markets

Author

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  • Frederick VAN DER PLOEG

Abstract

In the presence of Walrasian labor markets social policies harm hours worked, employment and output. In non-Walrasian labor markets with trade unions, efficiency wages and/or costly search and mismatch progressive taxation and corporatism induce wage moderation and boost employment and output. Although unconditional unemployment benefits destroy jobs, conditional benefits spur job growth. In a second-best world the usual effects of social policies are thus overturned. In addition, the incidence of taxation and the effects of tax progression depend crucially on the specific features of the welfare state, e.g., whether benefits are indexed to after-tax wages or not and unemployed people share fully in the tax burden or not. In a full political-economic equilibrium a more equitable distribution of income and assets leads to a more affluent median voter who votes for less 'populist' policies. Hence, employment and economic growth are higher and inflation lower.

Suggested Citation

  • Frederick VAN DER PLOEG, 2004. "DO SOCIAL POLICIES HARM EMPLOYMENT? Second-best effects of taxes and benefits on labor markets," Economics Working Papers ECO2004/11, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2004/11
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    Citations

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    Cited by:

    1. Frederick van der Ploeg, 2006. "Rolling back the public sector: differential effects on employment, investment, and growth," Oxford Economic Papers, Oxford University Press, vol. 58(1), pages 103-122, January.
    2. Silvia Rocha-Akis, 2012. "The Pain and Gain of Offshoring: The Effects of Tax Progression in a Segmented Labour Market," CESifo Working Paper Series 3739, CESifo Group Munich.
    3. Alexis, PARMENTIER, 2006. "The effects of the marginal tax rate in a matching model with endogenous labor supply," Discussion Papers (ECON - Département des Sciences Economiques) 2006011, Université catholique de Louvain, Département des Sciences Economiques.
    4. van Ewijk, Casper & Tang, Paul J.G., 2007. "Unions, progressive taxes, and education subsidies," European Journal of Political Economy, Elsevier, vol. 23(4), pages 1119-1139, December.
    5. Frederick Van der Ploeg, 2004. "The Welfare State, Redistribution and the Economy, Reciprocal Altruism, Consumer Rivalry and Second Best," CESifo Working Paper Series 1234, CESifo Group Munich.
    6. Bas Jacobs, 2009. "Is Prescott right? Welfare state policies and the incentives to work, learn, and retire," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(2), pages 253-280, April.

    More about this item

    Keywords

    social policies; redistribution; conditional unemployment benefits; non-Walrasian labor markets; second best; employment; growth; politics;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H0 - Public Economics - - General
    • J0 - Labor and Demographic Economics - - General
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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