Unemployment and labour taxation: an econometric analysis.

In this paper we analyze the determinants of the high unemployment level in Italy and the source of its persistence, with a special focus on the role of labour taxes. We use as reference an insider-outsider model capable of generating hysteresis; within this framework we are able to evaluate the unemployment effects of various shocks, and in particular shocks to the labour taxes level and shocks to the unemployment benefits level. We work with a reduced form of this model that is a structural VAR, in which the identification of the innovations is obtained through long run constraints; we estimate the model in a bayesian fashion. For sake of comparison the model is estimated also for USA, where the labour market is usually thought as more flexible than in Italy. From the estimation of the italian model it does emerge that the high tax level, jointly with the Unions role, strengthens the negative effects of demand side shocks and at the same time it may produce by itself direct negative effects on unemployment.