Fiscal-monetary policy interactions in the presence of unionized labor markets

This paper develops a framework for studying the interactions between labor unions, fiscal policy, monetary policy and monopolistically competitive firms. The framework is used to investigate the effects of labor taxes, the replacement ratio, labor market institutions and monetary policymaking institutions on economic peformance in the presence of strategic interactions between labor unions and the central bank. Given fiscal variables, higher levels of either centralization of wage bargaining, or of central bank conservativeness are associated with lower unemployment and inflation. However the forward shifting of changes in either labor taxes or in unemployment benefits to labors costs is larger the higher are those institutional variables. The paper also considers the effects of those institutions on the choice of labor taxes and of unemployment benefits by governments concerned with the costs of inflation and unemployment, as well as with redistribution to particular constituencies. A main result is that, normally, higher levels of centralization and conservativeness induce government to set higher labor taxes. JEL Classification: E5 · E6 · H2 · J3 · J5 · L1     

A multisectorial matching model of unions

We develop an equilibrium matching model where unions have an important institutional presence. Monopolistic competition characterizes the goods market, where only some sectors are unionized. Thus, the model can vary the coverage of collective bargaining. It can vary the degree of coordination between unions, and alternatively consider “national” and “sectorial” unions. Calibration to the union premium implies a workers’ rent extraction parameter much lower than assumed in the matching literature. We introduce unemployment insurance to study the interactions of policies with unions and find that unions only push for more generous benefits if this does not entail higher payroll taxes.     

Can an Unemployment Insurance System Generate Multiple Natural Rates?

This article studies some macroeconomic consequences of the financing of an unemployment insurance scheme. Under a balanced-budget rule, when both taxes and unemployment benefits are proportional to wages, the existence of multiple natural rates of unemployment is a generic property of the matching model. Government can lead the economy to a high equilibrium by fixing the rate of tax on wages and then setting the replacement ratio so that its expenditure matches its receipts.     

Unemployment insurance and capital accumulation

In this paper, I examine a model economy with production, search, and unemployment insurance. The introduction of capital into the economy of Wang and Williamson (J. Monetary Econom. 49(7)(2001)1337) generates the result that optimal replacement ratios are always zero. The result arises from the decline in aggregate activity caused by unemployment insurance: both capital and labor inputs to production fall when benefits rise. Unlike most of the literature, I compute explicitly the cost of the transition path; agents are made better off by switching to a steady state with no unemployment insurance, but the welfare gain is approximately cut in half. Only the very poor and unemployed suffer welfare losses along the transition path. I then briefly investigate the implications of negative replacement ratios.     

Housing and the labor market: Time to move and aggregate unemployment

Conventional macro-search models (Mortensen and Pissarides) with unemployment benefits and taxes have been able to account for the variation in unemployment rates across countries but do not account for the role geographic mobility or commuting time might play. We build a model in which both unemployment and mobility rates are endogenous. Our findings indicate that an increase in unemployment benefits and in taxes does not generate a strong decline in mobility but does increase unemployment as in the standard model. We find that with higher commuting costs the effect of housing frictions plays a large role and can generate a substantial decline in mobility.     

Optimal taxation and redistribution in an OLG model with unemployment

This paper concerns redistribution via nonlinear income taxation in an overlapping generations model with two ability-types. We assume that the wage rates are determined by bargaining between unions and firms, meaning that the equilibrium is characterized by involuntary unemployment. We show that the policy instruments that are used to calculate the marginal labor income tax rate for each ability-type give rise to intertemporal tax base effects. In addition, since the relationship between the employment and the capital stock implies intertemporal production inefficiency at the second best optimum, imperfect competition in the labor market may itself justify capital income taxation.      

Disability Risk, Disability Benefits, and Equilibrium Unemployment

This paper analyses the labour market and efficiency effects of various kinds of disability policies. It therefore extends Pissarides (1990) model of equilibrium unemployment with disability risk and disability benefits and allows for the improper use of disability schemes by the unemployed. The paper finds that recognition of this improper use can reverse the ranking of policies. In addition, it concludes that disability policies that reduce the participation in disability schemes tend to increase the rate of official unemployment. Only policies that lower the rate of disability shocks succeed to reduce both the participation in disability and unemployment schemes.     

Optimal taxation and welfare benefits with monitoring of job search

In order to investigate the interaction between tax policy, welfare benefits, the government technology for monitoring and sanctioning inadequate search, workfare, and externalities from work, we incorporate endogenous job search and involuntary unemployment into a model of optimal nonlinear income taxation. In this setting, the government faces a trade-off between boosting employment of low-skilled agents and raising work effort of high-skilled workers. If sanctions for inadequate search effort can be targeted at high productivity types for whom it is socially optimal to search, the government can afford to levy higher labor taxes on marginal workers without discouraging these agents from seeking work. This allows for lower marginal taxes on work effort of agents with a job. In contrast to workfare, job externalities in the private sector raise marginal tax rates, as the government attaches more importance to boosting employment of low-skilled workers.     

Unemployment insurance in a three-state model of the labor market

The paper extends the model of Krusell et al. (2010) to study the welfare effects of unemployment insurance. The model unemployment insurance program includes four realistic features: 1) a 50% replacement rate up to a benefit cap; 2) finite duration of eligibility during a jobless spell; 3) limited eligibility; and 4) and an imperfectly monitored job search requirement. The model is parameterized to fit the size of scope of unemployment insurance in the United States. Removing unemployment insurance from the model leads to only a 0.1% consumption equivalent increase in average welfare. Simplifying assumptions about the structure of unemployment insurance, such as allowing all job losers to receive benefits, lead to much larger welfare effects similar to the effects found in the past literature. Understanding the welfare effects of unemployment insurance requires careful modeling of the structure of the program.     

A theory of the natural unemployment rate and the duration of employment

In this paper, a theory of the natural or equilibrium rate of unemployment is built around a theory of the duration of employment. Evidence is presented that most unemployed workers became unemployed because their previous jobs came to an end; only a minority are on temporary layoff or have just entered the labor force. Thus, high-unemployment labor markets are generally ones where jobs are brief and there is a large flow of newly jobless workers. The model of the duration of employment posits that employment arrangements are the efficient outcome of the balancing of workers' and employers' interests about the length of jobs. Full equilibrium in the labor market also requires that the rate at which unemployed workers find new jobs be efficient. The factors influencing the resulting natural unemployment rate are discussed. Under plausible assumptions, the natural rate is independent of the supply or demand for labor. Only the costs of recruiting, the costs of turnover to employers, the efficiency of matching jobs and workers, and the cost of unemployment to workers are likely to influence the natural rate of unemployment strongly. Since these are probably stable over time, the paper concludes that fluctuations in the natural unemployment rate are unlikely to contribute much to fluctuations in the observed unemployment rate.     

Fiscal Policy Reforms in a Global Economy

Two countries are populated by workers and capitalists. Their governments collect taxes to finance productive expenditure and income redistribution. The share of income redistributed defines the size of the welfare state. Although both groups benefit from an abolition of the welfare state in the long run, the optimal fiscal policy in autarky can be characterized by maintaining a large welfare state since transfer cuts would induce transitional losses. Starting in such a position of policy inertia free trade and capital mobility is introduced. Fiscal policy competition leads to a reduction of tax rates and a relative increase of productive expenditure. If both countries coordinate their fiscal policy the reduction of taxes and income transfers is less pronounced. Quantitative effects of increasing globalization are assessed in a calibrated model for an average Europe G-4 country and the United States.     

Labour taxation,job creation and job destruction—Focusing on the role of wage setting

We study the effects of labour taxation in a search equilibrium model with endogenous job destruction, embedding three alternative models of wage setting: Nash bargain, monopoly union and efficiency wages. Tax policy implications vary considerably depending on the wage setting model and indexation of unemployment benefits. If wage setting is based on bargaining, a pure increase in the tax progression reduces unemployment, improves the relative position of low-income workers and facilitates the emergence of low-productivity jobs. However, this comes at the cost of reduced efficiency partly owing to lower average productivity. JEL Code J30, J51, J64, H24     

The welfare comparison of corrective ad valorem and unit taxes under monopolistic competition

The ad valorem versus unit tax debate has traditionally emphasized tax yield. On this criterion, ad valorem taxes outperform unit taxes in terms of welfare for a wide range of imperfect competition settings including Dixit–Stiglitz monopolistic competition. However, in a number of policy fields such as environmental, health, and trade economics, policy makers use taxes to reduce the production/consumption volume in an industry, i.e., to correct an externality rather than to improve tax yield. This paper compares the two tax instruments with respect to equal corrective effect in a Dixit–Stiglitz setting with love of variety, entry, exit, and redistribution of tax revenues. We find that unit taxes lead to more firms in the industry, less output per firm, less tax revenue, but higher welfare compared to ad valorem taxes.      

Fiscal policy with banks and financial frictions

We assess the role of banks to the transmission of optimal and exogenous changes in fiscal policy to the economy. We built-up a dynamic stochastic general equilibrium model with patient and impatient agents, banks and a government to find that banks and their associated capital-adequacy constraint mitigate the negative spill-over effects to the economy from higher taxes. Specifically, we confirm that labour income tax is the most distortionary fiscal instrument. The optimal choice of a housing tax is the most favorable funding source to a temporary increase in public spending. The combination of housing and labour taxes is the most preferred tax bundle to be optimally chosen under negative output shocks. Moreover, a permanent increase in housing tax is beneficial if it is welfare enhancing and the existence of banks benefits mainly impatient households under permanently higher consumption taxes. Finally, these results remain robust to various robustness checks.     

The Costs of Restrictive Trade Policies in the Presence of Factor Tax Distortions

This paper uses a numerical general equilibrium model to examine the quantitative importance of pre-existing factor tax distortions for the welfare effects of tariffs and import quotas. The presence of pre-existing taxes can greatly raise the costs of these policies, possibly by over several hundred percent. For a tariff much of this extra cost can be offset if tariff revenues are used to reduce distortionary taxes. Hence there can be a large cost discrepancy between tariffs and quotas. The optimal tariff for a country with market power in trade can be reduced to zero, unless revenues finance cuts in distortionary taxes.     

Optimal fringe benefit taxes: the implications of business use

Unless fringe benefits are taxed, remuneration may be distorted toward such benefits and away from wages and salaries. A principle for setting such taxes has been proposed in previous work. In particular, the value to workers of fringe benefits would be taxed at a rate equivalent to that on wages and salaries. The current paper reexamines this principle in a model where workers’ valuations are heterogeneous and unobservable to the tax authority. This model does have cases that are broadly consistent with the existing principle, but it also highlights cases in which taxes should be higher on fringe benefits that produce value for the firm.     

Public education reform: Community or national funding of education?

I use a political economy model of public funding of education to evaluate the welfare implications of a move from a community- to a nation-wide funding policy. Broadening the scope of education finance has intragenerational redistribution effects as well as intergenerational effects. Previous studies have emphasized the intragenerational redistribution effects of moving from local to state-financed systems, while holding factor prices fixed. The model in this paper includes a social security system and allows factor prices to vary endogenously. I examine the welfare effects of broadening the scope of financing from a community- to a nation-wide system and find that there are very large welfare gains as voters “internalize” the effect of the education policy on both factor prices and social security benefits. I also focus on the intergenerational distributional effects, finding that significant welfare gains occur despite the displacement of the median voter to an older agent that cares less about children's well-being.     

Altruism, incomplete markets, and tax reform

We compute the welfare effects of different revenue-neutral tax reforms that eliminate capital income taxation in two general equilibrium models calibrated to the U.S. economy. In our dynastic model, the reform with the largest welfare gain is the one that eliminates all income taxation and increases the consumption tax to 35%; 75% of the population alive at the time of the reform benefit from it. Individuals use intervivos transfers and bequests to redistribute the long-run benefits. In a pure life-cycle economy that lacks this redistribution technology, we find that the same reform would benefit only 9% of the population.     

Risk aversion and inequity aversion in demand for unemployment benefits

This paper is an empirical study of what motivates net contributors to support redistributive policies. While studies in the area have tended to consider broad measures of inequality and support for redistribution in general, we focus on a single, salient relationship between local unemployment rates and demand for spending on unemployment benefits. Using a particularity of the Spanish labour market, we estimate how workers’ stated preferences for unemployment benefits spending respond to changes in the local unemployment rate. We then decompose this response into the part explained by risk aversion, and thus demand for insurance, and the part explained by inequity aversion. Our results suggest that increases in local unemployment rates lead to increased demand by workers for unemployment benefits spending. Moreover, our results are consistent with an insurance motive driving this relationship but provide little support for inequity aversion. Our results suggest that studies of the relationship between inequality and demand for redistribution might benefit from considering both the source and measure of the inequality and the instrument of redistribution.     

Gender-based and couple-based taxation

In this paper, I explore the optimal taxation of singles and couples in an economy with bargaining couples. The government is concerned with the redistribution of income from individuals with high utility to individuals with low utility, recognizing that some individuals live in couple households where resources are unevenly distributed. I analyze how redistributive linear income taxes, which depend on either gender or household composition (or both) impact the distribution of utility within and across households. An interesting implication arising from the interaction between the model elements is that even though between-group lump-sum transfers always favor women, when the bargaining power of men is high, women are subject to a higher tax rate; this in contrast to previous analyses of gender-based taxation. My quantitative analysis demonstrates that the welfare effects of gender-based taxation are sizable and even larger when taxes depend on the composition of the household.