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Welfare states and unemployment

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This paper studies equilibrium unemployment in a search model where the government both provides liberal unemployment insurance and taxes labor at high progressive tax rates. It is shown how progressive income taxation can counteract a high unemployment rate under generous unemployment insurance. In particular, high marginal taxes reduce workers' incentives to switch jobs in response to changing economic opportunities. This lower labor mobility reduces unemployment but at the cost of a less efficient labor allocation.

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Authors and Affiliations

  1. Economics Department, State University of New York at Buffalo, 14260, Buffalo, NY, USA

    Lars Ljungqvist

  2. Hoover Institution, 94305, Stanford, CA

    Thomas J. Sargent

  3. University of Chicago, 60637, Chicago, IL, USA

    Thomas J. Sargent

Authors
  1. Lars Ljungqvist
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  2. Thomas J. Sargent
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Additional information

We are grateful to William Dupor, Krishna Kumar, and Ashok Rai for excellent computer programming.

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Ljungqvist, L., Sargent, T.J. Welfare states and unemployment. Econ Theory 6, 143–160 (1995). https://doi.org/10.1007/BF01213944

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  • DOI: https://doi.org/10.1007/BF01213944

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