Unemployment insurance is financed by a tax on wages below a given ceiling. Daniel S. Hamermesh (1977) advocates raising this ceiling on distributional grounds. In a job-search model, this does decrease unemployment among low-wage workers, but also increases unemployment among high-wage workers, and lowers everyone's expected after-tax wage. An increase in the ceiling, combined with a proportionate reduction in the tax rate, decreases unemployment for low-wage workers while increasing their after-tax wage, without affecting high-wage workers at all. When unemployment benefits and wages are taxed at one rate, employment and wages are independent of that rate.
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Volume (Year): 20 (1987) Issue (Month): 1 (February) Pages: 36-54 Download reference. The following formats are available: HTML,
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Handle: RePEc:cje:issued:v:20:y:1987:i:1:p:36-54
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