4 results
2 - Taxes, subsidies and equilibrium labor market outcomes
- Edited by Edmund S. Phelps, Columbia University, New York
-
- Book:
- Designing Inclusion
- Published online:
- 22 September 2009
- Print publication:
- 27 November 2003, pp 44-73
-
- Chapter
- Export citation
-
Summary
Abstract
We explore the effects of taxes and subsidies on job creation, job destruction, employment and wages in the Mortensen-Pissarides version of the search and matching equilibrium framework. Qualitative analytical results show that wage and employment subsidies increase employment, especially of low-skill workers, and also increase wages. A job creation or hiring subsidy reduces unemployment duration but increases incidence, with an ambiguous effect on overall employment. A firing tax has the reverse effects but the same indeterminacy. In the special case of a competitive search equilibrium, the one in which search externalities are internalized, there is a first-best configuration: no tax on the wage, an employment subsidy that offsets the distortions on the job destruction margin induced by unemployment compensation and employment protection policy, and a hiring subsidy equal to the implicit tax on severance imposed by any form of employment protection, with the costs of these and other policies financed by a non-distortionary consumption tax. Computational experiments confirm this ideal also determines the direction in which marginal improvements can be made both in terms of efficiency and in terms of improving low-skill worker employment and wage outcomes.
Introduction
Our purpose is to consider various tax and subsidy effects on wages and unemployment within the search and matching labor market framework.
Discussion
- Edited by Dennis J. Snower, University of London, Guillermo de la Dehesa
-
- Book:
- Unemployment Policy
- Published online:
- 07 September 2010
- Print publication:
- 15 May 1997, pp 247-249
-
- Chapter
- Export citation
-
Summary
Professor Phelps in chapter 7 provides strong and eloquent arguments supporting market intervention on behalf of low-wage workers. By encouraging the employment of low-income workers at higher wages, a wage subsidy would offset incentives to engage in negative social behaviour and would strengthen positive social values, the work ethic and respect for private property. A low-wage subsidy is needed to offset the recent rise in income inequality, whatever its source. Finally, a wage subsidy would reduce wasteful unemployment induced by imperfections associated with bargaining, rationing, and incentive wage policies.
The specifics of design that are discussed in chapter 7 seem to be sensible and useful. Phelps' efforts directed at proposing a programme that would minimise abuse by employers are of obvious practical importance. After restricting the subsidy to full-time workers only and then graduating it to reduce the incentive for fraud, Phelps uses US data for 1990 to obtain a cost estimate of $110 billion to bring hourly earnings up to $7 per hour for the lowest paid. However laudable and even though small relative to a $6 trillion economy, as he points out, this number is large in the current US political environment. Frankly, it would be difficult to imagine that such a programme would form a plank in either party's platform in the near future. However, if the US earnings distribution continues to widen and/or low-wage unemployment attains European levels, income redistribution of this form may well be on the agenda of the twenty-first century.
17 - The unemployment and welfare effects of labour market policy: a comparison of the USA and the UK
- Edited by Dennis J. Snower, University of London, Guillermo de la Dehesa
-
- Book:
- Unemployment Policy
- Published online:
- 07 September 2010
- Print publication:
- 15 May 1997, pp 545-572
-
- Chapter
- Export citation
-
Summary
A presumption that natural rates of unemployment are excessive is common, particularly in the economies of Europe. Two culprits are typically identified in the literature, labour market policies intended to compensate for lost earnings and excessive market power in the hands of employed worker ‘insiders’. According to Layard, Nickell and Jackman (1991), 91 per cent of the variation in unemployment rate averages over the 1983–8 time period across the principal 19 OECD industrial countries can be explained by variation in the liberality of unemployment insurance (UI) benefits, the extent of collective bargaining coverage, the degree of coordination in the wage determination process, and emphasis on active labour market policies. Although the authors recognise that unemployment rate differentials do not necessarily reflect differences in economic welfare, they argue that the effects of UI and labour bargaining powers are likely to yield ‘too much’ unemployment, particularly in Europe. Hence, their recommendations for the UK include a limitation on the duration of UI benefits, a strong ‘willingness to work’ test as a condition for the receipt of benefits, and an active labour market policy focused on those expected to have long unemployment spells. Active policies include adult training, recruiting subsidies, public employment as the ‘employer of last resort’ and wage subsidies.
The purpose of this chapter is to conduct computational experiments that reveal the quantitative implications of a particular labour market equilibrium model, that developed by Mortensen and Pissarides (1994), for the unemployment and welfare effects of existing labour market policy and possibly policy reforms.
15 - Estimating structural models of unemployment and job duration
- Edited by William A. Barnett, University of Texas, Austin, Ernst R. Berndt, Halbert White, University of California, San Diego
-
- Book:
- Dynamic Econometric Modeling
- Published online:
- 03 May 2010
- Print publication:
- 24 June 1988, pp 335-356
-
- Chapter
- Export citation
-
Summary
Available theoretical models of unemployment and job duration are based on a dynamic formulation of an individual worker's job search and job–matching problems. In general versions of the theory, the individual anticipates future arrival of an uncertain sequence of employment opportunities, whether currently employed or not. The worker controls the transition process between employment states and jobs by choosing search and acceptance strategies that maximize expected wealth given current information. In other words, the strategy is the solution to a well–defined dynamic programming problem.
Given a model of this type, the properties of the probability distributions of both the length of time spent looking for an acceptable job while unemployed and, once employed, the length of the specific job spell are endogenously determined by the optimal strategy and the structure of the decision problem. Hence, observations on the completed unemployment and job spell lengths experienced by a sample of workers provide information about the problem's structure. The purpose of this chapter is to develop methods suggested by the theory that an econometrician might find useful for the purpose of estimating structural parameters from available observations on realized unemployment and job spell lengths and to test their potential usefulness using Monte Carlo techniques.
Although structural models of unemployment and job spell duration have been available for some time, there are few attempts to estimate them in the literature. Instead, ad hoc specifications of the duration hazards borrowed from the statistical literature on survival and reliability analysis are estimated.