Unemployment Insurance, Taxes, and Unemployment
Randall Wright () and
Canadian Journal of Economics, 1987, vol. 20, issue 1, 36-54
Unemployment insurance is financed by a tax on wages below a given ceiling. Daniel S. Hamermesh (1977) advocates raising this ceiling on distributional grounds. In a job-search model, this does decrease unemployment among low-wage workers, but also increases unemployment among high-wage workers, and lowers everyone's expected after-tax wage. An increase in the ceiling, combined with a proportionate reduction in the tax rate, decreases unemployment for low-wage workers while increasing their after-tax wage, without affecting high-wage workers at all. When unemployment benefits and wages are taxed at one rate, employment and wages are independent of that rate.
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