Labor Tax Reform and Equilibrium Unemployment: A Search and Matching Approach

B.J. Heijdra, J.E. Ligthart

Research output: Working paperDiscussion paperOther research output

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.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages25
Volume2004-89
Publication statusPublished - 2004

Publication series

NameCentER Discussion Paper
Volume2004-89

Keywords

  • labour market
  • taxation
  • unemployment
  • matching

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