DO SOCIAL POLICIES HARM EMPLOYMENT? Second-best effects of taxes and benefits on labor markets
Frederick (Rick) van der Ploeg ()
No ECO2004/11, Economics Working Papers from European University Institute
In the presence of Walrasian labor markets social policies harm hours worked, employment and output. In non-Walrasian labor markets with trade unions, efficiency wages and/or costly search and mismatch progressive taxation and corporatism induce wage moderation and boost employment and output. Although unconditional unemployment benefits destroy jobs, conditional benefits spur job growth. In a second-best world the usual effects of social policies are thus overturned. In addition, the incidence of taxation and the effects of tax progression depend crucially on the specific features of the welfare state, e.g., whether benefits are indexed to after-tax wages or not and unemployed people share fully in the tax burden or not. In a full political-economic equilibrium a more equitable distribution of income and assets leads to a more affluent median voter who votes for less 'populist' policies. Hence, employment and economic growth are higher and inflation lower.
Keywords: social policies; redistribution; conditional unemployment benefits; non-Walrasian labor markets; second best; employment; growth; politics (search for similar items in EconPapers)
JEL-codes: E6 H0 J0 O4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe
References: Add references at CitEc
Citations View citations in EconPapers (6) Track citations by RSS feed
Downloads: (external link)
http://www.iue.it/PUB/ECO2004-11.pdf main text
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: http://EconPapers.repec.org/RePEc:eui:euiwps:eco2004/11
Access Statistics for this paper
More papers in Economics Working Papers from European University Institute Badia Fiesolana, Via dei Roccettini, 9, 50014 San Domenico di Fiesole (FI) Italy. Contact information at EDIRC.
Series data maintained by Anne Banks ().