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Unemployment Benefits as Redistribution Scheme of Trade Gains - a Positive Analysis

  • Marco de Pinto


    (University of Kassel)

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    Trade liberalization is no Pareto-improvement . there are winners (high-skilled) and losers (low-skilled). To compensate the losers the government is assumed to introduce unemployment benefits (UB). These benefits are financed by either a wage tax, a payroll tax, or a profit tax. Using a Melitz -type model of international trade with unionized labour markets and heterogeneous workers we show that: (i) UB .financed by a wage tax reduce aggregate employment but increase welfare measured by per capita output. (ii) UB financed by a payroll tax reduce aggregate employment and welfare. If UB exceeds a well-de.ned threshold, the trade gains will be completely destroyed. (iii) UB financed by a profit tax reduce the unemployment rate of the low-skilled, but also reduces welfare. The threshold for the level of UB, where the trade gains are destroyed by the redistribution scheme, is higher compared to the case of a payroll tax.

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    Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number 201210.

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    Length: 40 pages
    Date of creation: 2012
    Date of revision:
    Publication status: Forthcoming in
    Handle: RePEc:mar:magkse:201210
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