Unemployment versus In-work Benefits with Search Unemployment and Observable Abilities

Lans Bovenberg and Jan Boone

No 3043, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This Paper explores the optimal interaction between the tax system and unemployment compensation in insuring people against the risks of involuntary unemployment and low ability. To that end, we introduce search unemployment in a model of optimal non-linear income taxation. We find that the optimal search subsidy (i.e. the difference between the in-work benefit and the unemployment benefit) increases if, for efficient agents, the participation constraint (governing job search) becomes relatively more important than the incentive compatibility constraint (determining hours worked). The relation between unemployment benefits and the optimal level of in-work benefits (the number of people exerting positive work effort) is U (inversely U) shaped.

Keywords: Search; In-work tax benefits; Unemployment compensation (search for similar items in EconPapers)
JEL-codes: H21 J64 J65 (search for similar items in EconPapers)
Date: 2001-11
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Citations: View citations in EconPapers (7)

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