DIFFERENTIATED PAYROLL TAXES, UNEMPLOYMENT, AND WELFARE

This paper investigates the impact of payroll taxes on unemployment an d welfare in a two-sector economy characterised by imperfect competiti on in product and labour markets. The two sectors differ in market com petitiveness. It turns out that only the relative tax pressure affects unemployment and welfare. Unemployment can be reduced by having the l ess competitive sector pay higher taxes. Moreover, differentiated payr oll taxes will, in general, improve efficiency. Which sector to tax re latively more is, however, not clear. The government faces a tradeoff in the sense that unemployment is reduced only at the expense of reduc ed efficiency in the output mix. (C) 1998 Elsevier Science S.A. All ri ghts reserved.