We use a calibrated general equilibrium model with heterogeneous labor and search to evaluate the quantitative effects of various labor tax cut scenarios. The focus is on skill heterogeneity combined with downward wage rigidities at the low end of the skill ladder. Workers can take jobs for which they are overeducated. We compare targeted and nontargeted tax cuts, both with or without over-education effects. Introducing over-education changes substantially the employment, productivity and welfare effects of a tax cut, although tax cuts targeted on the least skilled workers always have larger effects.
The rise of early retirement in Europe is typically attributed to the European system of taxes and transfers. Contrary to a purely neoclassical framework, a model with imperfectly competitive labor market also allows to consider the effect of the bargaining power of labor and matching efficiency on preretirement. We find that lower bargaining power of workers and less efficient labor markets characterized by the declining matching efficiency have been an important determinant of early retirement in France and Germany. These structural changes, combined with early-retirement transfers and population ageing, are also consistent with the joint evolution of employment and unemployment rates, the labor share and the seniority premium.
The notion of frictional unemployment failed to grow into a full-fledged theory in the writings of Beveridge, Pigou and Hicks, as these economists were unwilling and/or unable to go beyond the thenprevailing Marshallian approach. Here, first we make explicit the trade organization assumptions underpinning Marshall's equilibrium theory. Next we examine Beveridge's, Pigou's and Hicks' early works on wages and unemployment. Finally, we look at the seminal papers that paved the way for search literature: McCall, Lucas and Prescott, Mortensen and Pissarides. We show that they succeed in providing an unemployment result, because they indeed depart from the Marshallian trade organization.
Selective Reductions in Labor Taxation: Labor Market Adjustments and Macroeconomic Performance *We use a calibrated general equilibrium model with heterogeneous labor and search to evaluate the quantitative effects of various labor tax cut scenarios. The focus is on skill heterogeneity combined with downward wage rigidities at the low end of the skill ladder. Workers can take jobs for which they are overeducated. We compare targeted and nontargeted tax cuts, both with or without over-education effects. Introducing over-education changes substantially the employment, productivity and welfare effects of a tax cut, although tax cuts targeted on the least skilled workers always have larger effects.
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