Working Paper: CEPR ID: DP3043
Authors: Jan Boone; Lans A. Bovenberg
Abstract: This Paper explores the optimal interaction between the tax system and unemployment compensation in insuring people against the risks of involuntary unemployment and low ability. To that end, we introduce search unemployment in a model of optimal non-linear income taxation. We find that the optimal search subsidy (i.e. the difference between the in-work benefit and the unemployment benefit) increases if, for efficient agents, the participation constraint (governing job search) becomes relatively more important than the incentive compatibility constraint (determining hours worked). The relation between unemployment benefits and the optimal level of in-work benefits (the number of people exerting positive work effort) is U (inversely U) shaped.
Keywords: in-work tax benefits; search; unemployment compensation
JEL Codes: H21; J64; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal search subsidy (H23) | participation constraint becomes more significant (D10) |
| optimal search subsidy (H23) | incentive compatibility constraint (D10) |
| participation constraint becomes more significant (D10) | optimal search subsidy increases (H23) |
| incentive compatibility constraint affects optimal search subsidy (D10) | participation constraint becomes more significant (D10) |