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

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Listed author(s):
  • Anna Batyra

    ()

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

  • Henri R. Sneessens

Abstract

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
Handle: RePEc:red:sed006:142
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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Keywords: Skill Bias; Minimum Wage; Job Creation; Job Destruction; Job Competition; Search Unemployment; Taxation;

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Find related papers by JEL classification:
  • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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Cited by:

  1. Raphael A Espinoza & Esther Perez Ruiz, 2016. "How Do Fiscal and Labor Policies in France Affect Inequality?," IMF Working Papers 16/41, International Monetary Fund.
  2. Ján Remeta & Sarah Perret & Martin Jareš & Bert Brys, 2015. "Moving Beyond the Flat Tax - Tax Policy Reform in the Slovak Republic," OECD Taxation Working Papers 22, OECD Publishing.
  3. Richard Duhautois & Fabrice Gilles, 2013. "Payroll tax reductions and job flows in France," Working Papers hal-01006652, HAL.
  4. Raphael A Espinoza & Esther Perez Ruiz, 2014. "Labor Tax Cuts and Employment; A General Equilibrium Approach for France," IMF Working Papers 14/114, International Monetary Fund.

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