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Labor tax reform and equilibrium unemployment: a search and matching approach

Ben Heijdra () and Jenny Ligthart

No 200409, CCSO Working Papers from University of Groningen, CCSO Centre for Economic Research

Abstract: The paper studies simple strategies of labor tax reform in a search and matching model of the labor market featuring endogenous labor supply. Changing the composition of the tax wedge---that is, reducing a payroll tax and increasing a progressive wage tax such that the marginal tax wedge remains unaffected---increases employment, reduces the equilibrium unemployment rate, and increases public revenue as long as workers do not have all the bargaining power in wage negotiations. A strategy of replacing employment taxes by payroll taxes increases employment and reduces the equilibrium unemployment rate, while the effect on public revenue is ambiguous.

Date: 2004
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Working Paper: Labor Tax Reform and Equilibrium Unemployment: A Search and Matching Approach (2004) Downloads
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