Public finance solutions to the European unemployment problem?

Abstract

Public finance solutions A tax shift away from low-paid labour may fight unemployment Unemployment in Europe is heavily concentrated among low‐skilled workers. It has therefore been suggested that structural unemployment could be reduced by shifting the tax burden away from low‐skilled labour and away from the production of consumer services, which are intensive in the use of such labour. This paper finds that a tax shift away from low‐paid labour may raise aggregate employment and welfare, but only if wage formation is sufficiently responsive to changing tax incentives. The analysis also suggests that non‐negligible employment and welfare gains could be reaped by offering tax concessions or subsidies to those parts of the consumer service sector which compete most directly with low‐productivity home production and with underground economic activity. — Peter Birch Sorensen