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Effects of labor taxes and unemployment compensation on labor supply in a search model with an endogenous labor force

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  • Chen, Been-Lon
  • Lai, Chih-Fang

Abstract

Labor taxes and unemployment compensation were blamed for causing relative declines in labor supply in the EU to the US in the past decades. We propose a model with an endogenous labor force and compare with the model with an exogenous labor force. Because of discouraging the labor force, labor taxes decrease employment in our model less than the model with an exogenous labor force, have ambiguous effects on hours, and decrease less labor supply in our model. Due to boosting the labor force, unemployment compensation increases employment in our model and decreases in the model with an exogenous labor force, but with opposite effects on hours, labor supply is ambiguous in both models. To understand the net effect on labor supply, we feed in the data of increases in labor taxes and unemployment compensation in the EU relative to the US. We find that the model with an exogenous labor force explain excessively of decreases in employment and labor supply, with increases in hours against the data. In contrast, our model explains reasonable decreases in labor supply, with sensible decreases in employment and in hours. Thus, with an endogenous labor force, our model explains relative declines in labor supply better than the model with an exogenous labor force.

Suggested Citation

  • Chen, Been-Lon & Lai, Chih-Fang, 2015. "Effects of labor taxes and unemployment compensation on labor supply in a search model with an endogenous labor force," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 300-317.
  • Handle: RePEc:eee:jmacro:v:43:y:2015:i:c:p:300-317
    DOI: 10.1016/j.jmacro.2014.12.005
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    2. Chen, Been-Lon & Hsu, Mei & Lai, Chih-Fang, 2016. "Relation between growth and unemployment in a model with labor-force participation and adverse labor institutions," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 273-292.

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    More about this item

    Keywords

    Search and matching; Labor force participation; Unemployment; Hours worked; Labor taxes; Unemployment benefits;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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