The Redistribution of Trade Gains When Income Inequality Matters

Marco De Pinto
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Marco De Pinto: Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University, Behringstr. 21, D-54296 Trier, Germany

Economies, 2015, vol. 3, issue 4, 1-30

Abstract: How does a redistribution of trade gains affect welfare when income inequality matters? To answer this question, we extend the [1] model to unionized labor markets and heterogeneous workers. As redistribution schemes, we consider unemployment benefits that are financed either by a wage tax, a payroll tax or a profit tax. Assuming that welfare declines in income inequality, we find that welfare increases up to a maximum in the case of wage tax funding, while welfare declines weakly (sharply) if a profit tax (payroll tax) is implemented. These effects are caused by the wage tax neutrality (due to union wage setting) and by a profit tax-induced decline in long-term unemployment. As a result, the government’s optimal redistribution scheme is to finance unemployment benefits by a wage tax.

Keywords: trade liberalization; redistribution; income inequality; heterogeneity; trade unions (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2015
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