December 1, 1998

Tax policy and the labor market: a sensitivity analysis with an AGE model

CPB's applied general equilibrium model MIMIC focusses on how the tax and social-security system impacts the labour market. Recently, a (preliminary) new model version has been completed.

This paper explores the sensitivity of its results to a number of parameter changes, focussing on new elements and important changes from the previous version, and paying special attention to how the impacts on (unskilled) unemployment are affected. The various parameters include substitution elasticities of the production functions, labour supply elasticities, export price elasticities, coefficients characterizing the wage formation process, and characteristics of the long-term unemployed.

Few changes have a strong overall impact on the effects of the (admittedly limited) set of tax changes considered. Usually, the impact is confined to a specific measure or to a small set of variables. In no case is the ranking of the measures in terms of their efficacy in combatting unemployment overturned. Reassuring as this may be, general conclusions cannot be based on the results presented. Sensitivity analysis taylored to the problem at hand must remain a standard element of policy evaluations.