samlet årgang - Økonomisk Institut - Københavns Universitet

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NATIONALØKONOMISK TIDSSKRIFT 2005. NR. 3
pation would be affected by the presence of involuntary unemployment. Following the
introduction of in-work benefits, those who obtain jobs would experience a discrete
(as opposed to an infinitesimal) increase in utility because some of them were previously
involuntarily unemployed. This reinforces the positive effect of the working
poor policy on welfare. Increasing traditional welfare programs, on the other hand,
creates higher unemployment. To the extent that people lose their jobs involuntarily,
the welfare loss is exacerbated relative to the case of voluntary unemployment. In conclusion,
a model with labor market imperfections generating involuntary unemployment
would most likely increase the attractiveness of redistributing to the working
poor and reduce the attractiveness of increasing traditional welfare programs, thereby
reinforcing the main conclusion of this paper.
Second, there might be issues related to the presence of segmented labor markets.
A well-known hypothesis is that labor markets tend to have a dual structure, being segmented
into a perfectly competitive sector offering low-paying, low-productivity jobs
and an imperfectly competitive sector offering high-paying, high-productivity jobs.
Indeed, labor economists have gathered considerable evidence in favor of the dual
labor market hypothesis, see, e.g., the survey by Saint-Paul (1996) pp. 62-8. In the
dual labor market model, there is a distortion in the allocation of employment in favor
of the perfectly competitive sector offering low-paying jobs. As pointed out by Bulow
and Summers (1986), this implies that the government ought to use industrial policy to
shift resources away from the low-productivity sector. In the context of a tax reform,
Kleven and Sørensen (2003) show that such sectored distortions tend to make policies
aimed at the working poor less attractive, because they promote bad jobs at the expense
of good jobs. A policy which succeeds in increasing aggregate employment by
promoting low paying jobs may, in theory, reduce welfare as it creates a deterioration
in the sectored mix of employment. It seems unlikely, however, that a composition effect
of this sort, would be able to dominate the large gains from a higher level of employment
at the bottom of the distribution. Even with segmented labor markets it remains the case
that higher employment at the bottom creates large effects on government revenue (and
hence efficiency), as participation tax rates are particularly high at the bottom.
Labor force participation may also generate externalities. Positive externalities of
working would make the introduction of in-work benefits even more attractive relative
to traditional welfare, while negative externalities would make in-work benefits less
attractive. Some of these externalities take the form of fiscal externalities, where
higher employment rates affect the demand for certain commodities that are initially
taxed or subsidized by the government. For example, higher employment may generate
more demand for childcare, which would then create positive or negative externalities
depending on whether this commodity carries a positive or negative tax rate (in
the Nordic countries, for example, child care is heavily subsidized). Externalities