Luciano Fanti
Regulated Wage Economy and Taxation Systems: A Long-Run Welfare and Growth Theoretical Analysis

Abstract: The debate on the macroeconomic effects of the regulation of wages and of unemployment benefits which has also occurred in the recent years in Italy is long lasting. Conventional wisdom holds that both may be harmful for efficiency, although often advocated for equity reasons. Another controversial debate concerned the taxation of capital income. In this paper we have shown that, despite the common wisdom which considers harmful the regulation of wages in that source of output losses, the introduction of a minimum wage legislation, although on the one hand it generates market inefficiencies and unemployment, on the other hand it may also, surprisingly, improve both long-run economic growth and the lifetime welfare. Moreover, it may generate welfare gains even when it generates a output losses. From a policy point of view, the aim of this paper was to investigate whether the introduction of a minimum wage and of an unemployment insurance mechanism may eventually enhance long run welfare, if the increase of the tax burden on capital income is used for preserving the government balanced budget instead of financing other public expenditures. Our findings showed, in contrast with the prevailing wisdom, that positive effects always appear. Therefore, these findings offer some important policy implications so far not explored.

JEL: E24; O41.
Keywords: Minimum wage; Unemployment; Home Production; Capital Income Tax; Neoclassical Economic Growth; Welfare.



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