Financing unemployment benefits by goods market competition: fiscal policy and deregulation with market imperfections

We consider a model in which the labor market is characterized by search frictions and there is monopolistic competition in the goods market. We introduce proportional income taxation and unemployment benefits with Government balanced budget constraint. Then, we evaluate the effects of both more competition in the goods market and higher unemployment benefits on labor market equilibrium and equilibrium tax rate. We show that more competition has a positive effect on equilibrium unemployment and the Government budget. Higher unemployment benefits can be financed either by higher tax rate or increasing goods market 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 if they are incisive enough to keep the tax rate unchanged.