Pareto-Improving Unemployment Policies
34 Pages Posted: 18 Oct 2006
Date Written: September 2006
We investigate how continental European unemployment can be reduced without reducing unemployment benefits and without reducing the net income of low-wage earners. Lower unemployment replacement rates reduce unemployment, the net wage and unemployment benefits. A lower tax on labour increases net wages and - for certain benefit-systems - unemployment benefits as well. Combining these two policies allows to reduce unemployment in countries with "net-Bismarck" and Beveridge systems without reducing net income of workers or of the unemployed. Such a policy becomes self-financing under realistic parameter constellations when taxes are reduced only for low-income workers.
Keywords: inequality, unemployment, taxation, policy reform
JEL Classification: J38, J51, H23, E60
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