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

CentER Discussion Paper No. 2004-89

24 Pages Posted: 10 Nov 2004

See all articles by Ben J. Heijdra

Ben J. Heijdra

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

Jenny E. Ligthart

Tilburg University - CentER, Department of Economics; University of Groningen - Faculty of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 2004

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.

Keywords: Labor market, taxation, unemployment, matching

JEL Classification: J3, J680

Suggested Citation

Heijdra, Ben J. and Ligthart, Jenny E., Labor Tax Reform and Equilibrium Unemployment: A Search and Matching Approach (September 2004). CentER Discussion Paper No. 2004-89. Available at SSRN: https://ssrn.com/abstract=616607 or http://dx.doi.org/10.2139/ssrn.616607

Ben J. Heijdra (Contact Author)

University of Groningen - Department of Economics ( email )

P.O. Box 800
9700 AV Groningen
Netherlands
+31 50 363 7303 (Phone)
+31 50 363 7337 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Jenny E. Ligthart

Tilburg University - CentER, Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 8755 (Phone)
+31 13 466 4032 (Fax)

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
88
Abstract Views
934
rank
284,354
PlumX Metrics