Growth, Unemployment and Tax/Benefit system in European Countries

Quintero-Rojas, Coralia and Adjemian, Stéphane and Langot, François (2008): Growth, Unemployment and Tax/Benefit system in European Countries.

Abstract

This paper analyzes how the frictions in the labor market simultaneously affect the economic growth and the long run unemployment. To this goal, we develop a Schumpeterian model of endogenous growth: agents have the choice of being employed or being doing R&D activities. Unemployment is caused by the wage-setting behavior of unions. We show that: (i) High labor costs or powerful trade unions lead to higher unemployment and lower economic growth. (ii) Efficient bargain allows to increase employment, at the price of a lower growth rate. These theoretical predictions are consistent with our empirical analysis based on 183 European Regions, between 1980-2003. Finally, in a welfare exercise, we show that the optimal growth rate can be reached by compensating the distortions on the goods-sector due to the growth process with the distortions induced by the labor market rigidities.

• Item Type: MPRA Paper
• Language: English
• Keywords: Endogenous growth, unemployment, labor market institutions, welfare
• Subjects: J - Labor and Demographic Economics > J5 - Labor-Management Relations, Trade Unions, and Collective Bargaining > J51 - Trade Unions: Objectives, Structure, and Effects; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O33 - Technological Change: Choices and Consequences ; Diffusion Processes

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