Negative Income Tax and Labor Market Participation. A Short Run Analysis

Abstract

This article examines the effects of the negative income tax, in a matching model, on labor market participation. We show that the introduction of such instrument reduces unemployment and improves the situation of the poorest. But, amazingly, it provokes a fall on labor market participation principally because the agents are then less selective. We find another surprising result: despite the rise on participation, the increasing of unemployment benefits improves the situation of the firms at the expense of workers.

Keywords

• matching
• participation
• negative income tax