Working Paper: CEPR ID: DP1983
Authors: A. Lans Bovenberg; Johan J. Graafland; Ruud A. de Mooij
Abstract: This paper employs MIMIC, an applied general equilibrium model of the Dutch economy, to explore various tax cuts aimed at combating unemployment and raising labour supply. MIMIC combines modern labour-market theories, a firm empirical foundation, and a detailed description of Dutch labour-market institutions. We develop a small aggregate model, which contains the core of MIMIC, namely wage setting, job matching, labour supply and labour demand. In addition to illustrating the main economic mechanisms in MIMIC, the small model shows the advantages of employing a larger, more disaggregated model that accounts for heterogeneity, institutional details, and more economic mechanisms.Targeting in-work benefits at the low skilled is the most effective way to cut economy-wide unemployment but damages the quality and quantity of labour supply. Cuts in social security contributions paid by employers and subsidies for hiring long-term unemployed reduce unskilled unemployment most substantially. Tax cuts in the higher tax brackets boost the quantity and quality of formal labour supply but are less effective in reducing unemployment and in raising unskilled employment and female labour supply.
Keywords: tax policies; structural unemployment; labour supply; applied general equilibrium model; the Netherlands
JEL Codes: D58; E62; J41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax cuts targeting in-work benefits for low-skilled workers (H31) | reduce economy-wide unemployment (E24) |
| Tax cuts targeting in-work benefits for low-skilled workers (H31) | negatively impact labor supply quality and quantity (J24) |
| Cuts in social security contributions for employers and hiring subsidies for long-term unemployed (J68) | significantly reduce unskilled unemployment (F66) |
| Tax cuts in higher brackets (H29) | increase the quantity and quality of formal labor supply (J24) |
| Tax cuts in higher brackets (H29) | less effective in reducing unemployment and enhancing female labor supply (J79) |