THE IMPACT OF EMPLOYMENT TAX CUTS ON UNEMPLOYMENT AND WAGES - THE ROLE OF UNEMPLOYMENT BENEFITS AND TAX STRUCTURE

I model and simulate the effects of employment tax cuts on unemploymen t and wages in four equilibrium models: competitive, union bargaining, search and efficiency wages. I find that if the ratio of unemployment compensation to wages is fixed, the effect of the tax cut is mainly o n wages. But if income out of work is fixed in real terms, there are s ubstantial employment effects. When wages are determined by bargaining , revenue-neutral reforms that make the tax more progressive also redu ce unemployment. Thus, policy towards unemployment compensation and ta x structure are key influences on the effect of taxes on unemployment.