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Unemployment and the Dynamic Effects of Factor Income Taxation

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  • Shouyong Shi
  • Quan Wen

Abstract

This paper introduces search unemployment into an intertemporal maximization model with capital accumulation. It characterizes the decentralized search equilibrium, examines the dynamic effects of factor income taxation and calculates the welfare cost of the taxation. Four tax policies are considered: labor income taxation, capital income taxation, the subsidy to job search and the subsidy to hiring. It is found that the dynamic effects and welfare costs of these policies are quite different from the standard model without unemployment. The differences illustrate the importance of the labor market frictions.

Suggested Citation

  • Shouyong Shi & Quan Wen, 1994. "Unemployment and the Dynamic Effects of Factor Income Taxation," Working Paper 909, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:909
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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_909.pdf
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    Cited by:

    1. Shi, Shouyong & Wen, Quan, 1997. "Labor market search and capital accumulation: Some analytical results," Journal of Economic Dynamics and Control, Elsevier, vol. 21(10), pages 1747-1776, August.
    2. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
    3. Friese, Max, 2015. "The labor market effect of demographic change: Alleviation for financing social security," Thuenen-Series of Applied Economic Theory 138, University of Rostock, Institute of Economics.

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