Labor Taxation in Search Equilibrium with Home Production

28 Pages Posted: 8 Feb 2000

See all articles by Bertil Holmlund

Bertil Holmlund

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2001

Abstract

Conventional models of equilibrium unemployment typically imply that proportional taxes on labor earnings are neutral with respect to unemployment as long as the tax does not affect the replacement rate provided by unemployment insurance, i.e., unemployment benefits relative to after-tax earnings. When home production is an option, the conventional results may no longer hold. This paper uses a search equilibrium model with home production to examine the employment and welfare implications of labor taxes. The employment effect of a rise in a proportional tax is found to be negative for sufficiently low replacement rates, whereas it is ambiguous for moderate and high replacement rates. Numerical calibrations of the model indicate that employment generally falls when proportional labor taxes are raised. Progressive labor taxes increase labor market tightness but have ambiguous effects on search effort and employment.

Keywords: Home Production, Job Search, Unemployment, Taxation

JEL Classification: H24, J22, J64

Suggested Citation

Holmlund, Bertil, Labor Taxation in Search Equilibrium with Home Production (April 2001). Available at SSRN: https://ssrn.com/abstract=205671 or http://dx.doi.org/10.2139/ssrn.205671

Bertil Holmlund (Contact Author)

Uppsala University - Department of Economics ( email )

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IZA Institute of Labor Economics

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