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The magic of layoff taxes requires equilibrium stability

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Abstract

In the same vein as Blanchard and Tirole (J Eur Econ Assoc 6:45–77, 2008) First Pass, this note shows that, under the condition for equilibrium stability, the partial implementation of layoff taxes invariably increases firms’ profits as well as workers’ utilities by lowering payroll taxes. It also proves that, due to multiple equilibria, requiring stability does not raise any equilibrium existence issue per se. These insights could favor the introduction of firing taxes, which in practice would probably be a gradual process.

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Notes

  1. BT explain why this private system is not viable.

  2. See (WP) for detailed derivations.

  3. Note that Proposition 1 is deduced from Results 3 and 4, meaning that it holds for any distribution, G(.).

  4. In France, the general exemptions from social contributions (Fillon reform) were implemented in stages, for>2 years. The same holds for the reduction in working hours, “35 heures.”

References

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  • Gavrel, F. (2017). The Magic of Layoff Taxes Requires Equilibrium Stability. Working paper, CREM, University of Caen Normandy and CNRS. May 2017, revised version. Available on the website IDEAS.

  • L’Haridon, O., & Malherbet, F. (2009). Employment protection reform in search economies. European Economic Review, 53(3), 255–273.

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Acknowledgements

I would like to thank Olivier Blanchard for his comments. I am also indebted to Yannick L’Horty, Yves Zénou and the Editor, Kimberley Scharf, for their helpful suggestions. The usual caveat applies.

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Authors and Affiliations

  1. CREM, CNRS (UMR 6211) and Université de Caen Normandie, Esplanade de la Paix, 14000, Caen, France

    Frédéric Gavrel

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  1. Frédéric Gavrel
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Correspondence to Frédéric Gavrel.

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Gavrel, F. The magic of layoff taxes requires equilibrium stability. Int Tax Public Finance 25, 404–411 (2018). https://doi.org/10.1007/s10797-017-9459-y

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  • DOI: https://doi.org/10.1007/s10797-017-9459-y

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