Essays on Labour Taxation and Unemployment Insurance

Pekka Sinko

No 111, Research Reports from VATT Institute for Economic Research

Abstract: The study consists of four essays, which analyse the implications of labour taxation and unemployment insurance (UI) in the models of imperfectly competitive labour markets. The first essay studies the effects of labour taxation on unemployment and efficiency in a search equilibrium model with endogenous job destruction. It is shown that the adverse employment effect of labour taxes is mainly due to the prolonged spells of unemployment. A pure increase in the tax progression may reduce unemployment and facilitate the emergence of low-productivity jobs. In the second essay, the link between taxes and the public benefits is perceived owing to the centralised wage setting institutions. This is shown to promote wage moderation, make wages and employment less sensitive to wage taxation and reduce hours worked. The third essay considers alternative ways to organize the government subsidies in a model, where taxalike payments are collected by the industry level funds in order to finance unemployment benefits. It is shown that equilibrium unemployment is decreasing in the share of UI financed by the employed union members. The fourth essay analyses the effects of UI in a job search model with endogenous search effort. It is shown that UI with a limited potential duration induces more search effort among the long-term unemployed who have exhausted a considerable amount of the current benefits.

Keywords: Labour taxation, unemployment insurance, trade union model, search model, Labour market, Työmarkkinat, Taxation, Verotus, Effectiveness of public services, Julkisten palvelujen vaikuttavuus, E240 - Macroeconomics: Employment; Unemployment; Wages; wage indexation, H200 - Taxation, Subsidies, and Revenue: General, J300 - Wages, Compensation, and Labor Costs: General, J500 - Labor-Management Relations, Trade Unions, and Collective Bargaining: General, (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-ias, nep-lab, nep-mac and nep-pbe
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