Employment subsidy with capital mobility

Manuel Leite-Monteiro, Maurice Marchand, Pierre Pestieau

Research output: Contribution to journalArticlepeer-review

7 Citations (Scopus)

Abstract

Most models of tax competition assume full employment. Yet, actually one often observes that fiscal competition, particularly when it is aimed at attracting investment, is motivated by the concern of fighting unemployment and enhancing job creation. The present paper considers a multicountry model with capital mobility and unemployment. Fiscal policy has two opposing objectives: financing unemployment insurance and increasing employment. In each country there is a majority vote on this policy. The purpose of the paper is to analyse how opening borders to capital flows modifies the median voter's choice of the employment subsidy. Assuming that capital and labour are complements, economic integration is shown to raise the employment subsidy with fixed wages. This agrees with intuition as a larger employment subsidy attracts more capital. However, when wages are set by labour unions economic integration can change the median voter's choice in either direction.

Original languageEnglish
Pages (from-to)327-344
Number of pages18
JournalJournal of Public Economic Theory
Volume5
Issue number2
DOIs
Publication statusPublished - 2003

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