Public finance solutions to the European unemployment problem?

Author: Sorensen P.P.B.¹

Source: Economic Policy, Volume 12, Number 25, October 1997 , pp. 221-264(44)

Publisher: Blackwell Publishing

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Abstract:

Unemployment in Europe is heavily concentrated among low-skilled workers. It has therefore been suggested that structural unemployment could be reduced by shifting the tax burden away from low-skilled labour and away from the production of consumer services, which are intensive in the use of such labour. This paper finds that a tax shift away from low-paid labour may raise aggregate employment and welfare, but only if wage formation is sufficiently responsive to changing tax incentives. The analysis also suggests that non-negligible employment and welfare gains could be reaped by offering tax concessions or subsidies to those parts of the consumer service sector which compete most directly with low-productivity home production and with underground economic activity.

Language: English

Document Type: Research article

Affiliations: 1: University of Copenhagen and Economic Policy Research Unit, Copenhagen

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