Financing unemployment benefits: dismissal versus employment taxes
Baumann, Florian ; Stähler, Nicolas
Labour. Review of Labour Economics and Industrial Relations
2006
20
3
September
433-451
dismissal ; employment ; tax ; unemployment benefit
Personnel management
English
Bibliogr.
"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."
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