Optimal Unemployment Insurance And Redistribution

Robin Boadway and Katherine Cuff

No 1375, Working Paper from Economics Department, Queen's University

Abstract: We characterize optimal income taxation and unemployment insurance in a search-matching framework where both voluntary and involuntary unemployment are endogenous and Nash bargaining determines wages. Individuals differ in utility when voluntarily unemployed (non-participants in the labour market) and decide whether to participate as a job seeker and if so, how much search effort to exert. Unemployment insurance trades off insurance versus moral hazard due to search. We show that it is optimal to have a positive linear wage tax without any redistributive concerns even if search is efficient so the Hosios condition is satisfied. We also allow for different productivity types so there is a redistributive role for the income tax and show that a proportional wage tax internalizes the macro effects arising from endogenous wages. Lump-sum income taxes and transfers can then redistribute between individuals of differing skills and employment states. Our analysis embeds optimal unemployment insurance into an extensive-margin optimal redistribution framework where transfers to the involuntary and voluntary unemployed can differ, and nests several standard models in the literature.

Keywords: optimal income taxation; unemployment insurance (search for similar items in EconPapers)
JEL-codes: H21 H3 J6 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2016-12
New Economics Papers: this item is included in nep-ias and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1375.pdf First version 2016 (application/pdf)

Related works:
Journal Article: Optimal unemployment insurance and redistribution (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1375

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