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20161018

ReviewofUnemploymentModel

u=a/(1f) wage
MoregenerousEI:higherunemployment
laboursupply
u unemploymentrate
a propensitytoshirk Firmsraisethewage
f generosityofEI O tolowershirking
wagesetting
A
Intuition productivityriseswithgap=(w x)
labourdemand
x=outsideoption=(1u)w+ufw
labour

moregenerousEIfgapprodty rms
trytogapagainbywlabourdemandu

AddTaxestotheModel NumericalIllustration
u=a/[1(f/(1t))] u=a/[1 (f/(1t))]

t employee payroll(orpersonalincome)taxrate u=0.06,f=0.5,initialt=0.15,


shirkingpropensity,a,mustbe0.02
higheremployeetaxgapprodty rmstry
togapagainbywlabourdemandu considertrisingfrom0.15to0.25andthento0.35
aandfstayconstant
Othertaxeshavenoeffect onunemploymentrate: unemploymentraterisesfrom5%,to6%andthento
SalestaxespaidwhenspendingbothwagesandEI 8.67%
Employertaxaffectsallemployerswillingnesstopay
Taxoncapitalsearnings same

CombineUnemploymentRateModel
WithMarginalProductivity
RisingInequality:SomePolicyResponses
TheoryofIncomeDistribution AntiPovertyInitiatives
GuaranteedAnnualIncome
Purpose:toassessfourapproachestoaddressing EmploymentInsurance
poverty
WorkingIncomeTaxBenefit
Twoconstraints needtoberespected: SubsidiestoFirmsforEmployingLowSkilledPeople
Questions
governmenthastoraiserevenuetofinanceeach Wheredoesthegovernmentgettherevenue?
initiative
Whichprogramworksbest?
theglobalizationconstraint capitalisverymobile
internationally Isitbettertodecreaseourfocusoninequalityand
tofocusonpromotingfastereconomicgrowth?

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20161018

Necessary Background for Analyzing


Alternative Approaches to Poverty
OutputUnits
firmsuselabourandcapitaltoproduceoutput
wefocusoncapitalanddrawasupplydemandgraph
forcapitalemployedinCanada DomesticDemand:Marginal
ProductivityofCapitalinCanada
capitalismobileinternationally
thisfactisincorporatedinthesupplydemandgraphby O

indicatingthatworldownersofcapitalarewillingto LabourIncome
WorldSupply
rentasmanyunitsofcapitaltoCanadianproducersas
theywant,aslongasCanadianproducersmeetthe CapitalIncome CapitalInput
goingrentalratethatisavailabletocapitalownersin
therestoftheworld

OutputUnits OutputUnits Conclusion(Appreciatedby


LossofGDP AntiGlobalizationProtesters):
TheAttempttoTaxCapital
HurtsUnskilledLabour
DomesticDemand:
ProductivityofCapital DomesticDemand:ProductivityofCapital
O Labour O
WorldSupplywithTaxonK Income WorldSupplywithTax

Taxes/Transfers

CapitalInput CapitalIncome CapitalInput

OutputUnits OutputUnits EmploymentInsurance:


GuaranteedAnnualIncome: AsaGroupUnskilledLabour
UnskilledLabourWorseOff IsWorseOff:Redistribution
ProductivityofCapitalinCanada FromEmployedtoUnemployed

ProductivityofCapitalinCanada
Labour O WithLowerEmploymentofLabour
O
Income WorldSupplywithTax
WorldSupplywithTax
Taxes/Transfers

CapitalIncome CapitalInput CapitalInput

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20161018

GuaranteedAnnualIncome GuaranteedAnnualIncome
independentofemploymentstatus independentofemploymentstatus
unrateunaffectedbutunskilledareworseoff EmploymentInsurance
EmploymentInsurance incentivetobeunemployedsounratehigher
incentivetobeunemployedsounratehigher WorkingIncomeTaxBenefit
wagehigherso(fw)higher incentivetobeemployedsounratelower
transferfromemployedtounemployed MPofKscheduleshiftsup
MPofKscheduleshiftsdown
solabourasagroupisworseoff

GuaranteedAnnualIncome
independentofemploymentstatus
WorkingIncomeTaxBenefit:
OutputUnits EmploymentInsurance
AsaGroupUnskilledLabour
IsBetterOffbutRedistribution incentivetobeunemployedsounratehigher
FromUnemployedtoEmployed WorkingIncomeTaxBenefit
incentivetobeemployedsounratelower
ProductivityofCapitalinCanada
WithHigherEmploymentofLabour
O butwageisbiddown(sofw islower)
WorldSupplywithTax w(1 t)ishigher
transferisfromunemployedtoemployed
CapitalInput aslongasweareonthesensiblesideofthe
Laffercurve,labourasagroupbetteroff

taxrevenue AntiPovertyInitiatives
LafferCurve
GuaranteedAnnualIncome
independentofemploymentstatus
EmploymentInsurance
O incentivetobeunemployed
WorkingIncomeTaxBenefit
incentivetobeemployed
taxrate
SubsidiestoFirmsforEmployingLowSkilledPeople
0% 100% incentivetohiremore

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20161018

Subsidy to Employers
for Hiring Unskilled Workers
OutputUnits
EmploymentSubsidytoFirms:
AsaGroupUnskilledLabour
SuggestedbyNobelLaureateNedPhelps IsBetterOff NoRedistribution
Governmentencouragesfirmstohire WithinLabourGroup
unskilledworkersbypayingpartofthewage this
ProductivityofCapitalinCanada
lowersunemploymentandpusheswagesup WithHigherEmploymentofLabour
O
Betterthanencouragingworkerstoacceptlow WorldSupplywithTax
wagejobs bytoppingupincomewithahousehold
taxbreak sincethislowersunemploymentbut
pusheswagesdown CapitalInput
Further:notransferwithintheunskilledlabour
groupisinvolved theyall benefit

u=a(1 s)/(1 f)sounrateislower Summary


marketwageisbidupsoboth
employed(whogetw) Governmentcanhelpaddress
andunemployed(whogetfw) inequality despiteglobalization
arebetteroff Employmentsubsidiesareevenmore
thereisnotransferwithintheunskilledlabour helpfuliffinancedbyothertaxes
groupisinvolved theyall benefit
afreelunchsincecapitalistsarenothurt
suchasacarbontax sincewewould
globalization whichhassohelpedtheunskilledin thentaxactivitieswedonotwant
thedevelopingworld doesnotneedtobe (polluting)notthingswedowant
rejected (earningincomeandhavinglotsof
buttoughpoliticalsell(transferstofirmsnot capitalforlabourtoworkwith)
households)

Wehaveseenthatredistributionawayfrom
capital ownersisnotpossibleinaworldwhere
capitalcanescapetolowtaxjurisdictions OutputUnits
ClosedEconomy
MarginalProductofCapital
Thisfactpromptssometogiveuptryingto Supply
redistributealtogether
Thisgroupfocusesongiving taxbreakstothe O
richiftheysavemore withthehopethat LabourIncome
unskilledlabourwillhavemorecapitaltowork
with andsothepoorcouldbenefitindirectly
Thisrisingtidewillliftallboatsstrategyhas CapitalIncome CapitalInput
beencalledTrickleDownEconomics
Doesitwork?

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20161018

OutputUnits OutputUnits
ClosedEconomy SmallOpenEconomy
MarginalProductofCapital

Supply DomesticDemand:Marginal
ProductivityofCapitalinCanada
SupplyAfterTax
O O
BreakforRichtoSave
LabourIncome LabourIncome
WorldSupply

CapitalIncome
CapitalIncome CapitalInput CapitalIncome CapitalInput

OutputUnits OutputUnits
ThreeWayDistributionofIncome TrickleDownEconomicsFails

DomesticSupply DomesticSupply
DomesticSupplyAfter
DomesticDemand: TaxCutForDomesticSavers
O O
ProductivityofCapitalinCanada DemandforCapitalinCanada
Labour Labour
Income Income
WorldSupply WorldSupply

DomesticCapital ForeignCapital DomesticCapital Foreign


Income Income CapitalInput Income Income CapitalInput

InasmallopeneconomysuchasCanada TrickleDownisnotreliableinasmallopen
TrickleDown worksonlyinthesensethat economy
arisingtideliftsallyachts PercolateUpeconomicsismorereliable
itinvolvesthegovernmentdirectlyaddressing
thefundamentalproblematthelowendof
theeconomicladder unemploymentamong
theunskilled
anditworks despitetheglobalization
constraint
sowecan dosomethingaboutourown
inequalitywithoutreversingthevastreduction
inworldinequality