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Financing Unemployment Benefits: Dismissal versus Employment Taxes
Author(s) -
Baumann Florian,
Stähler Nikolai
Publication year - 2006
Publication title -
labour
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.403
H-Index - 34
eISSN - 1467-9914
pISSN - 1121-7081
DOI - 10.1111/j.1467-9914.2006.00349.x
Subject(s) - dismissal , unemployment , economics , labour economics , offset (computer science) , externality , microeconomics , macroeconomics , law , political science , computer science , programming language
. This paper investigates the effects of using dismissal taxes to finance unemployment benefits. We compare dismissal and employment taxes in a model with search frictions. Employment taxes give rise to externalities because firms do not take into account the effects their dismissal decisions have on others. These externalities can be tackled by using dismissal taxes to finance unemployment insurance. Taking into account the budget for unemployment insurance, employment taxes can be reduced by more than is necessary to offset the adverse effect of dismissal taxes on the value of the firm. The introduction of dismissal taxes leads to higher job creation and lower unemployment.