Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/56540
Authors: 
de Pinto, Marco
Year of Publication: 
2012
Series/Report no.: 
Joint discussion paper series in economics 10-2012
Abstract: 
Trade liberalization is no Pareto-improvement - there are winners (high-skilled) and losers (low-skilled). To compensate the losers the government is assumed to introduce unemployment benefits (UB). These benefits are financed by either a wage tax, a payroll tax, or a profit tax. Using a Melitz-type model of international trade with unionized labour markets and heterogeneous workers we show that: (i) UB financed by a wage tax reduce aggregate employment but increase welfare measured by per capita output. (ii) UB financed by a payroll tax reduce aggregate employment and welfare. If UB exceeds a well-defined threshold, the trade gains will be completely destroyed. (iii) UB financed by a profit tax reduce the unemployment rate of the low-skilled, but also reduces welfare. The threshold for the level of UB, where the trade gains are destroyed by the redistribution scheme, is higher compared to the case of a payroll tax.
Subjects: 
trade liberalization
heterogeneous firms
trade unions
skill-specific unemployment
unemployment benefits
taxes
JEL: 
F1
F16
H2
Document Type: 
Working Paper

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