We study optimal government spending in a business cycle model with frictional unemployment. The Ramsey optimal policy …

determine employment. Unions raise the efficiency costs of income redistribution, because unemployment benefits and income taxes … raise wage demands and thereby generate involuntary unemployment. Optimal unemployment benefits and optimal income taxes are …

between high wages and low unemployment risk. A higher marginal tax rate shifts the trade-off in favor of low unemployment … risk, whereas a higher tax burden or unemployment benefit has the opposite effect. Changes in unemployment generate fiscal … and that the provision of unemployment insurance justifies a positive marginal tax rate even without income heterogeneity …