Financing Unemployment Benefits through Fiscal Policies and Increasing Competition

This paper considers a model with labor market frictions and monopolistic competition in the goods market. It also introduces proportional income taxation and unemployment benefits with a balanced government budget constraint. The paper evaluates the effects of more competition and higher unemployment benefits. The findings reveal that more competition has a positive effect on employment and the government budget. Higher unemployment benefits can be financed by both higher tax rate and increasing competition. Further, liberalization policies could permit, (a) To avoid an increase in unemployment, if we allow some rise in the tax rate; or (b) To decrease unemployment keeping the tax rate unchanged.