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Selective Reductions in Labour Taxation: Labour Market Adjustments and Macroeconomic Performance

  • Anna Batyra

    ()

    (Currently: Eitan Berglas School of Econ. IRES/ECON/Catholic University of Louvain)

  • Henri R. Sneessens

Significant differences in unemployment incidence in Europe have been observed across skill groups, with the least skilled suffering the highest and most persistent unemployment rates. To identify policies alleviating this problem, we study the impact of reductions in employer social security contributions. We construct a general equilibrium model with three types of heterogeneous workers and firms, matching frictions, wage bargaining and a rigid minimum wage. We find evidence in favour of narrow tax cuts targeted at the minimum wage but we argue that it is most important to account for the effects of such reductions on both job creation and job destruction. The failure to do so may explain the gap between macro- and microeconometric evaluations of such policies in France and Belgium. Policy impact on welfare and inefficiencies induced by job competition, ladder effects and on-the-job search are discussed.

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 142.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:142
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