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

  • Marco de Pinto
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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 labor markets and heterogeneous workers we show that: (i) there is a threshold level of UB where all trade gains are destroyed, (ii) this threshold differs between different kind of taxes, (iii) there is a clearcut ranking in terms of welfare for the chosen funding of the UB: 1. wage tax, 2. profit tax, 3. Payroll tax.

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    Paper provided by FIW in its series FIW Working Paper series with number 092.

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    Length: 41
    Date of creation: May 2012
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    Handle: RePEc:wsr:wpaper:y:2012:i:092
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