Labor Tax Reform and Equilibrium Unemployment: A Search and Matching Approach
CentER Discussion Paper No. 2004-89
24 Pages Posted: 10 Nov 2004
Date Written: September 2004
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: Suggested Citation