Taxation and Unemployment in Models with Heterogeneous Workers

Marcus Hagedorn, Iourii Manovskii and Sergiy Stetsenko
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Sergiy Stetsenko: GM Financial

Review of Economic Dynamics, 2016, vol. 19, 161-189

Abstract: We introduce ex-ante heterogeneity between workers and two technology shocks, neutral and investment-specific, as the driving forces into the basic Mortensen-Pissarides search and matching model. The calibrated model is simultaneously consistent with a strong response of labor market variables to cyclical fluctuations in productivity and a weaker response to changes in taxes found in cross-country data. The model also matches the evidence that countries with higher tax rates have higher aggregate productivity, lower skill premia, and higher unemployment rates among both high- and low-skilled workers. The key mechanism that allows us to achieve these results is that aggregate and group-specific productivities are endogenous and respond to changes in tax policy. (Copyright: Elsevier)

Keywords: Search; Matching; Business cycles; Heterogeneity; Labor markets (search for similar items in EconPapers)
JEL-codes: E24 E32 J63 J64 J68 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (14)

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DOI: 10.1016/j.red.2015.12.004

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