Edited by Neri Salvadori and Arrigo Opocher
welfare and growth theoretical analysis and a policy exercise Luciano Fanti and Luca Gori 12.1. INTRODUCTION There has been a protracted debate around the macroeconomic effects of the regulation of wages and the introduction of unemployment insurance benefits. Conventional wisdom, dating back to the seminal paper by Stigler (1946), holds that both may be harmful, mainly because they tend to reduce output, employment, labour supply and welfare. However, higher wages for non-specialised workers and benefits for unemployed people are often advocated for equity reasons. Another controversial debate in economics, especially in Italy in recent years, has concerned the taxation of capital income. Although some recent literature1 has relaxed the efficiency-equity trade-off by showing that in some cases a minimum wage could even be welfare-improving regardless of its negative effect on unemployment, we note, however, that these models are neither concerned with standard public policies such as unemployment insurance systems and income taxation nor are they framed in the basic dynamic overlapping generations (OLG) model adopted in this chapter. Therefore, to the best of our knowledge there is no literature that formally explores the joint role played by policy interventions on the labour market on the one side – e.g., regulation of wages and unemployment insurance mechanisms – and on the tax system on the other. We explore how different taxation systems used to finance unemployment benefits as well as an amount of unproductive public expenditure affects both long-run output and welfare. We show that while taxing the income of young people (either...
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