Tax reform and the Dutch labor market: an applied general equilibrium approach

This paper develops an applied general equilibrium model to explore various tax cuts aimed at combating unemployment and raising labor supply. The mod el calibrates modern labor-market theories on wage setting, job matching, l abor supply and labor demand on Dutch data. It represents the core: of a la rger applied general equilibrium model for the Netherlands called MIMIC. Si mulations reveal that targeting in-work benefits at the low skilled is the most effective way to cut economy-wide unemployment. However, targeting is likely to damage the quality and quantity of labor supply. Tax cuts in the higher tax brackets boost the quantity and quality of formal labor supply b ut are less effective in reducing unemployment and in raising unskilled emp loyment and female labor supply. (C) 2000 Elsevier Science S.A. All rights reserved.