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Labor Taxation in Search Equililbrium with Home Production

  • Holmlund, Bertil

    ()

    (Department of Economics)

Conventional models of equilibrium unemployment typically imply that proportional taxes on labor earnings are neutral with respect to unemployment as long as the tax does not affect the replacement rate provided by unemployment insurance, i.e., unemployment benefits relative to after-tax earnings. When home production is an option, the conventional results may no longer hold. This paper uses a search equilibrium model with home production to examine the employment and welfare implications of labor taxes. The employment effect of a rise in a proportional tax is found to be negative for sufficiently low replacement rates, whereas it is ambiguous for moderate and high replacement rates. Numerical calibrations of the model indicate that employment generally falls when proportional labor taxes are raised. Progressive labor taxes increase labor market tightness but have ambiguous effects on search effort and employment. The numerical calibrations indicate positive employment effects.

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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2000:1.

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Length: 31 pages
Date of creation: 17 Jan 2000
Date of revision:
Publication status: Published in German Economic Review, 2002, pages 415-430.
Handle: RePEc:hhs:uunewp:2000_001
Contact details of provider: Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Web page: http://www.nek.uu.se/
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