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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Policy Modeling, Volume 32, Issue 4, July–August 2010, Pages 531–543
We use a calibrated general equilibrium model with heterogeneous labor and search to evaluate the quantitative effects of various labor tax cut scenarios. The focus is on skill heterogeneity combined with downward wage rigidities at the low end of the skill ladder. Workers can take jobs for which they are overeducated. We compare targeted and non-targeted tax cuts, both with or without over-education effects. Introducing over-education changes substantially the employment, productivity and welfare effects of a tax cut, although tax cuts targeted on the least skilled workers always have larger effects.
Many European countries, including the largest ones, are characterized by high labor taxes and high unemployment rates (Nickell, 2004). Although the causal relationship between labor taxes and unemployment remains a much debated issue, there are strong social and political pressures favorable to payroll tax cuts. The aim of this paper is to evaluate the quantitative effects of various labor tax cut scenarios on employment, productivity and welfare. To that end, we develop a calibrated general equilibrium model with heterogeneous labor and search. The main implications of a labor tax cut in a standard aggregate model are well-known. With an inelastic labor supply curve (or wage-setting curve in an imperfect competition setup), tax cuts lead to higher net wages and have little impact on employment. By definition, such aggregate models fail to take into account the heterogeneity observed on actual labor markets. Accounting for this heterogeneity may be crucial, especially if payroll tax cuts are targeted on specific groups of workers. We focus in this paper on skill heterogeneity. This choice is motivated by the fact that the unemployment rise has been especially strong for low-skill workers. Several mechanisms may have contributed to this outcome. One possible mechanism is the rigidity of relative wages resulting, for instance, from minimum wage regulations in the face of asymmetric productivity shocks (see Greenaway & Winchester, 2007) who emphasize the role of embodied technological change and capital-skill complementarities). Tax cuts targeted on low-skill workers may in this context be seen as a means to decrease their relative wage cost and stimulate low-skill employment without changing relative net wages. An alternative mechanism has also attracted attention. Low-skill unemployment can be the result of job competition between high- and low-skill workers in a depressed labor market. If high-skill job seekers react to a demand slack by searching on both the high- and the low-skill segments of the labor market and by accepting jobs for which they are over-qualified, they will “crowd out” some low-skill workers. If wages are downward rigid at the bottom of the skill ladder, this crowding-out effect will lead to more low-skill unemployment. Dolado, Felgueroso, and Jimeno (2000) examine Spanish labor market and find symptoms of over-education. Similar conclusions are drawn for instance by Mavromaras, McGuiness, O’Leary, Sloane, and Fok (2007) for Britain and Australia. To examine the implications of payroll tax cuts in such contexts, we set up a general equilibrium model including the government budget constraint and a representation of the labor market à la Mortensen and Pissarides (1994), with job competition effects as in Albrecht and Vroman (2002) and Blazquez and Jansen (2008), and on-the-job search as in Dolado, Jansen, and Jimeno (2002) and Gautier (2002). We distinguish three types of jobs and three types of workers. We first neglect job competition effects and evaluate the implications of targeted and non-targeted tax cuts. We next re-examine the same tax cut scenarios when there is job competition and overeducated workers hold low-skill jobs. The model is calibrated on Belgian data, but the comparisons across scenarios are valid for other countries sharing similar features in terms of low-skill unemployment and downward wage rigidities at the low end of the skill ladder. Our paper is closest to Pierrard (2005). This paper distinguishes only two types of jobs and workers but has an endogenous job destruction rate. It suggests, by comparison with previous general equilibrium models, that the effects of a tax cut targeted on minimum wages can be very large and come through the job destruction rather than the job creation channel.1 This result is in line with the empirical results obtained for instance by Laroque and Salanié (2000), Crépon and Desplatz, 2001 and Crépon and Desplatz, 2002 and Kramarz and Philippon (2001) on French data. The relative importance of the job destruction channel (as opposed to the job creation channel) may however be overemphasized in the Pierrard (2005) setup as, by construction, the direct impact of minimum wage changes is on the job destruction rate. In our paper, we reintroduce a direct link between job creation and minimum wages by distinguishing three categories of jobs and workers. The third and lowest-skill group is defined as workers on low-skill jobs, paid the minimum wage. With three skill categories, we can also refine the analysis of job competition effects. For computational reasons, we compensate these additional complexities by assuming an exogenous job destruction rate. We know of course from Pierrard (2005) to what extent the endogenizing of the destruction rate would reinforce our results. Agénor, Nabli, Yousef, and Jensen (2007) also investigate the effects of payroll tax cuts targeted on low-skill workers, in the context of developing countries with internal and external migrations. Our main policy conclusions can be summarized as follows. Absent job competition effects, narrow targeting at minimum wages is crucial for the success of a tax cut policy: employment effects are large enough to render the measure self-financing and beneficial for all categories of workers. This confirms Pierrard's results, despite the fact that we neglect the job destruction channel. Introducing job competition does not reverse the main conclusion: tax cuts targeted on minimum wage jobs have sizeable effects on low-skill unemployment. The cost per job created is however severely increased, which sharply reduces the welfare gains for workers with higher skill levels. This suggest that, in the face of job competition and in order to reverse the ladder effect to some extent, one should prefer a scheme combining large tax rebates for low-skill jobs, substantially smaller rebates for medium-skill jobs and no tax rebate at all for high-skill jobs.
نتیجه گیری انگلیسی
To assess the effects of structural payroll tax cuts targeted on specific skill groups, we use a stylized inter-temporal general equilibrium with search and matching on the labor markets. This model is able to shed light on the results obtained in previous quantitative analyses. Compared to earlier studies, we use a model with a finer definition of skill groups. We find that targeting payroll tax cuts at minimum wages is crucial. In such a scenario, there is substantial job creation affecting the low-skill workers because their wages are very sensitive to tax cuts and recruitment costs are low. Furthermore, through capital accumulation and the labor productivity channel, there are positive job creation spill-overs across skill groups. Absent job competition and de-skilling effects, tax cuts targeted at the minimum wage would be largely self-financing and benefit all categories of workers. We show however that introducing job competition and de-skilling (or “ladder”) modifies substantially the results. Although job creation remains large and the total cost of extra jobs remains quite reasonable in % of GDP, the negative externalities associated with job competition may quickly become large (even with realistic values of the percentage of overqualified workers) and translate into negative welfare effects for the majority of workers. This result points out to the potential importance of political economy aspects and the need to design tax cut scenarios apt to limit job competition (by combining for instance substantial tax rebates for minimum wage workers with much smaller but positive rebates for intermediate wages, and zero rebates for high wages). In the context of the current global downturn, both European and USA economies have faced a sharp rise in unemployment rates (IMF, 2009), from 5.6% in 2007 to 9% in 2009, and going up. Our analysis has focused on structural unemployment and relative wage rigidities, as opposed to cyclical unemployment fluctuations. However, our work can shed light on some key issues related to cyclical phenomena and ensuing job competition whose negative effect shows in our quantitative study. By definition, a cyclical downturn is global and hits all sectors and skills levels simultaneously, even though job separations may be larger for low-skilled workers (e.g. because the cost of both separation and later re-hiring may be substantially lower for the low-skilled as they benefit from lower firing compensations and can be more easily substituted for one another). Furthermore, ceteris paribus, a global downturn exacerbates job competition and de-skilling effects, since skilled workers who lost their jobs have an incentive to also search for jobs below (but not too far) from their skill level, which further increases the unemployment rate of the low-skilled. Employment Outlook (OECD, 2009) reports that the low-skilled were indeed particularly hit during this crisis, the sensitivity of low skilled employment to negative shocks being much higher than that of high skilled employment, and that a degree of crowding-out between skill groups has taken place and is expected to intensify when the number of unemployed increases. Reacting to a purely cyclical phenomenon by payroll tax cuts targeted on the low-skilled may be in this context an inappropriate policy reaction, as it would further exacerbate such job competition. On the other hand, measures aiming at reducing “cyclical” job destruction should be welcome. This could be done, for instance, via temporary subsidies meant to sustain contractual relationships. Such measures have been used in several countries (e.g. short-time subsidies introduced in Ireland, Mexico, New Zealand, and extended in France, Germany, Belgium, Korea; or reductions in non-wage labor costs for all workers in Germany, Japan and Mexico). Moreover, maintaining and expanding eligibility for unemployment benefits for longer unemployment spells (as done in numerous countries) may help reduce wasteful job competition and de-skilling effects, by giving the unemployed a possibility to continue searching on their “home” market rather than taking de-skilling jobs because of financial constraints. Our analysis also stresses the political economy aspects of selective tax cuts. Because of their redistributive implications, especially in the face of job competition, selective tax cuts may be hard to implement in normal times. The current unemployment hike may be the ideal time to do so.6 Such a policy may also help avoid that a part of the current unemployment hike becomes structural via a negative effect of skill loss or stigma on the long-term unemployed.