FINANCING UNEMPLOYMENT BENEFITS BY GOODS MARKET COMPETITION: FISCAL POLICY AND DEREGULATION WITH MARKET IMPERFECTIONS

We consider a model with labor market frictions and monopolistic competition in the goods market. We introduce proportional income taxation and unemployment benefits with Government balanced budget constraint. We evaluate the effects of both more competition and higher unemployment benefits. We show that more competition has a positive effect on employment and the Government budget. Higher unemployment benefits can be financed both by higher tax rate and by increasing competition. Liberalization policies could permit: a) to avoid an increase in unemployment if we allow some rise in the tax rate; b) to decrease unemployment keeping the tax rate unchanged.