Welfare states and unemployment

Lars Ljungqvist, Thomas J. Sargent

    Research output: Contribution to journalArticlepeer-review

    Abstract

    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.

    Original languageEnglish (US)
    Pages (from-to)143-160
    Number of pages18
    JournalEconomic Theory
    Volume6
    Issue number1
    DOIs
    StatePublished - Feb 1995

    ASJC Scopus subject areas

    • Economics and Econometrics

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