Ronnie Schöb

Dissatisfied with Life, but Having a Good Day: Time-Use and Well-Being of the Unemployed

We apply the Day Reconstruction Method to compare unemployed and employed people with respect to their subjective assessment of emotional affects, differences in the composition and duration of activities during the course of a day, and their self-reported life satisfaction. Employed persons are more satisfied with their life than the unemployed and report more positive feelings when engaged in similar activities. Weighting these activities with their duration shows, however, that average experienced utility does not differ between the two groups. Although the unemployed feel sadder when engaged in similar activities, they can compensate this by using the time the employed are at work in more enjoyable ways. Our finding that unemployment affects life satisfaction and experienced utility differently may be explained by the fact that people do not adjust their aspirations when becoming unemployed but face hedonic adaptation to changing life circumstances, triggered by the opportunity to use the time in a way that yields higher levels of satisfaction than working.

Alleviating Unemployment: The Case for Green Tax Reforms

It has been argued recently that imposing taxes on pollution produces additional tax revenues, which can then be used to replace labor taxes and thus reap a double dividend in the form of improving environmental quality and alleviating unemployment. This paper analyzes the employment effects of revenue-neutral green tax reforms by focusing on the revenue recycling effect on employment. Our model contains three features which are important when looking at the employment effects of green tax reforms: 1) there is unemployment in equilibrium; 2) wages are determined endogenously; and 3) various institutional arrangements for taxing unemployment benefits, for the price-indexation of unemployment benefits and for personal tax allowances are considered. The employment effects of a revenue-neutral green tax reform are sensitive to institutional arrangements concerning taxation and indexation of unemployment benefits and personal tax allowances. A revenue-neutral green tax reform will boost employment if unemployment benefits are untaxed and nominally fixed. Employment actually falls if unemployment benefits are taxed and price indexed. When employment changes, the functional distribution of income also changes. Total private income, after-tax profits and after-tax labor income increase with employment, while transfer income decreases. If the polluting good is normal, a positive employment effect reduces the environmental dividend obtained from a revenue-neutral green tax reform.

The Double Dividend Hypothesis of Environmental Taxes: A Survey

This survey reviews the recent literature on the double-dividend hypothesis of environmental taxes and discusses some extensions of the standard model such as the distributional consequences and the importance of the non-separability assumption between consumption goods and environmental quality for the optimal design of environmental policies. Turning to a model with imperfect labour markets we then show under which circumstances environmental taxes on polluting inputs in production and on polluting consumption goods can reap a second dividend in the form of an employment dividend and discuss the welfare implications. Finally, we turn to international aspects of environmental taxation. When environmental problems are tied to the use of exhaustible resources, resource-consuming countries can appropriate resource rents at the cost of resource-owning countries by levying environmental taxes strategically.

Optimal Factor Income Taxation In The Presence Of Unemployment

According to conventional wisdom internationally mobile capital should not be taxed or should be taxed at a lower rate than labour. An important underlying assumption behind this view is that there are no market imperfections, in particular that labour markets clear competitively. At least for Europe, which has been suffering from high unemployment for a long time, this assumption does not seem appropriate. This paper studies the optimal factor taxation in the presence of unemployment which results from the union-firm wage bargaining both with optimal and restricted profit taxation when capital is internationally mobile and labour immobile. In setting tax rates the government is assumed to behave as a Stackelberg leader towards the private sector playing a Nash game. The main conclusion is that in the presence of unemployment, the conventional wisdom turns on its head; capital should generally be taxed at a higher rate than labour.

Outsourcing of Unionized Firms and the Impact of Labor Market Policy Reforms

This paper shows that outsourcing of parts of the workforce in unionized firms leads to wage moderation both in the case of strategic and flexible outsourcing. As long as the share of the outsourced workforce is not too large, this wage-moderation effect on domestic employment outweighs the direct substitution effect so that domestic employment increases in unionized firms as outsourcing costs fall. With respect to the impact of labor tax reform changes in the wage tax rate, the tax exemption and the unemployment benefit payments affect domestic wage setting in the same way as in the absence of outsourcing. Furthermore, increasing the degree of tax progression by keeping the relative tax burden per worker constant continues to be good for employment. However, except for low outsourcing activities, the impact of these policy measures will become smaller as outsourcing costs fall.

Welfare Policy in the Presence of Unionised Labour and Internationally Mobile Firms

In oligopolistic industries, increased cost saving opportunities via offshoring have a moderating effect on trade unions. In order to discourage mobile firms from leaving the country, unions accept lower sector wages. In effect, the negotiated wage becomes independent of workers’ bargaining power and their domestic outside opportunities. Hence, wage moderation - induced by deeper economic integration - creates leeway for the government to engage in redistributive policies even if this improves the workers’ outside options. Only if the latter become sufficiently attractive will redistribution induce some offshoring, and it is only at that level that further economic integration will lead to both wage moderation and offshoring activities. Therefore, our analysis suggests that rather than provoking a downsizing of the welfare state, offshoring defines an upper limit for the generosity of the welfare state below which redistribution becomes less instead of more distortive.

Marginal Employment Subsidization: A New Concept and a Reappraisal

In this paper, we attempt to renew the interest in marginal employment subsidies. Such subsidies are paid only for a firms additional employment exceeding some reference level and create larger employment stimuli at lower fiscal costs than general wage subsidies for all workers. If the hiring of a new employee also entails subsidizing an incumbent worker (double marginal subsidization), the replacement of regular paid workers by outsourcing employment to newly established firms – a standard critique of marginal employment subsidies – can be avoided. This additional subsidy reduces the incentive to crowd out regular employment and results in even larger employment effects. Applying the subsidy scheme to the low-skill labor market in Germany, we show that employment can be substantially increased without imposing additional fiscal burden.

Does the Composition of Wage and Payroll Taxes Matter Under Nash Bargaining

Using the Nash bargaining approach to wage negotiations this paper shows that conventional wisdom, according to which the total tax wedge is the sum of wage and payroll taxes, is valid for equal tax bases, e.g., when the tax exemption takes the form of a tax credit. However, the equivalence result ceases to hold when the tax bases are unequal due to tax allowances. In this case a revenue-neutral restructuring of labour taxes toward a narrower tax base decreases the gross wage and is thus good for employment.

Environmental Taxes and Pre-Existing Distortions: The Normalization Trap

The double-dividend hypothesisclaims that green taxes will both improve the environment andreduce the distortions of existing taxes. According to the earlierliterature on the double dividend the tax rate for pollutinggoods should be higher than the Pigovian tax which fully internalizesthe marginal social damage from pollution, in order to obtaina ’second dividend‘. On the contrary, Bovenberg and de Mooij(1994) argue that environmental taxes typically exacerbate, ratherthan alleviate, pre-existing distortions. The optimal pollutiontax should therefore lie below the Pigovian tax. This paper pointsout that there is no real contradiction between these apparentlyopposing policy recommendations. It will be shown that the differencein the results appears because, implicitly, different definitionsof the second-best optimal pollution tax are chosen.

Tax progression under collective wage bargaining and individual effort determination

We study the impact of tax policy on wage negotiations, workers’ effort, employment, output and welfare when workers’ effort is only imperfectly observable. We show that the different wage-setting motives – rent sharing and effort incentives – reinforce the effects of partial tax policy measures but not necessarily those of more fundamental tax reforms. Although a higher degree of tax progression always leads to wage moderation, the well-established result from the wage bargaining literature that a revenue-neutral increase in the degree of tax progression is good for employment does not carry over to the case with wage negotiations and imperfectly observable effort. While it remains true that introducing tax progression increases employment and output, we cannot rule out negative effects from an increase in tax progression when tax progression is already very high. Welfare effects are ambiguous a priori but we derive sufficient conditions for welfare improving revenue-neutral increases in tax progression.