Taxes, Subsidies and Equilibrium Labour Market Outcomes

Christopher Pissarides and Dale Mortensen

No 2989, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We explore the effects of taxes and subsidies on job creation, job destruction, employment and wages in the Mortensen-Pissarides version of the search and matching equilibrium framework. Qualitative analytical results show that wage and employment subsidies increase employment, especially of low skill workers, and also increase wages. A job creation or hiring subsidy reduces unemployment duration but increases incidence with an ambiguous effect on overall employment. A firing tax has the reverse effects but the same indeterminacy. In the special case of a competitive search equilibrium, in which search externalities are internalized, there is a first best configuration. The results are: no tax on the wage, an employment subsidy that offsets the distortions on the job destruction margin induced by unemployment compensation and employment protection policy, as well as a hiring subsidy equal to the implicit tax on severance imposed by any form of employment protection. The costs of these and other policies are financed by a non-distortionary consumption tax. Computational experiments confirm this ideal also determines the direction in which marginal improvements can be made both in terms of efficiency and in terms of improving low skill worker employment and wage outcomes.

Keywords: Employment taxes; Employment subsidies; Wage taxes; Firing tax; Hiring subsidy; Search and matching; Unemployment; Wage inequality (search for similar items in EconPapers)
JEL-codes: H23 J31 J64 J68 (search for similar items in EconPapers)
Date: 2001-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

Downloads: (external link)
https://cepr.org/publications/DP2989 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Taxes, Subsidies and Equilibrium Labor Market Outcomes (2002)
Working Paper: Taxes, subsidies and equilibrium labor market outcomes (2001)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:2989

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP2989

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().