Optimal Taxation and Employment Policy with a Centralized Wage Settin g.

Public policy is examined where the economy-wide labor and employer organizations bargain about wages. The main findings are as follo ws: employment subsidies must fall with the elasticity for the demand for labor but payroll subsidies on inputs which are not fully employ ed must rise with it; these subsidies must be uniform in all sectors and when optimally set, they will equalize all union wages as well as all producer wages for unemployed labor; and the government should p ay such unemployment benefits that the marginal utilities of income f or the employed and the unemployed become equal. Copyright 1987 by Royal Economic Society.