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Unemployment Benefits as Redistribution Scheme of Trade Gains - a Positive Analysis

Marco de Pinto

Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century from Verein für Socialpolitik / German Economic Association

Abstract: Trade liberalization is no Pareto-improvement - there are winners (high-skilled) and losers (low-skilled). To compensate the losers the government is assumed to introduce unemployment benefits (UB). These benefits are financed by either a wage tax, a payroll tax, or a profit tax. Using a Melitz-type model of international trade with unionized labour markets and heterogeneous workers we show that: (i) UB financed by a wage tax reduce aggregate employment but increase welfare measured by per capita output. (ii) UB financed by a payroll tax reduce aggregate employment and welfare. If UB exceeds a well-defined threshold, the trade gains will be completely destroyed. (iii) UB financed by a profit tax reduce the unemployment rate of the low-skilled, but also reduces welfare. The threshold for the level of UB, where the trade gains are destroyed by the redistribution scheme, is higher compared to the case of a payroll tax.

JEL-codes: F10 F16 H20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab
Date: 2012
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