Public finance solutions to the European unemployment problem?

Peter Birch Sørenson

Economic Policy, 1997, vol. 12, issue 25, 222-264

Abstract: Summary Public finance solutions A tax shift away from low-paid labour may fight unemploymentUnemployment in Europe is heavily concentrated among low-skilled workers. It has therefore been suggested that structural unemployment could be reduced by shifting the tax burden away from low-skilled labour and away from the production of consumer services, which are intensive in the use of such labour. This paper finds that a tax shift away from low-paid labour may raise aggregate employment and welfare, but only if wage formation is sufficiently responsive to changing tax incentives. The analysis also suggests that non-negligible employment and welfare gains could be reaped by offering tax concessions or subsidies to those parts of the consumer service sector which compete most directly with low-productivity home production and with underground economic activity.— Peter Birch Sørensen

Date: 1997
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