This paper develops an applied general equilibrium model to explore various tax cuts aimed at combating unemployment and raising labor supply. The model calibrates modern labor-market theories on wage setting, job matching, labor supply and labor demand on Dutch data. It represents the core of a larger applied general equilibrium model for the Netherlands called MIMIC. Simulations reveal that targeting in-work benefits at the low skilled is the most effective way to cut economy-wide unemployment. However, targeting is likely to damage the quality and quantity of labor supply. Tax cuts in the higher tax brackets boost the quantity and quality of formal labor supply but are less effective in reducing unemployment and in raising unskilled employment and female labor supply.

Applied general equilibrium model, Labor supply, Structural unemployment, Tax policy, The Netherlands
Computable and Other Applied General Equilibrium Models (jel D58), Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation (jel E62), Contracts: Specific Human Capital, Matching Models, Efficiency Wage Models, and Internal Labor Markets (jel J41),
Journal of Public Economics
Erasmus School of Economics

Bovenberg, A.L, Graafland, J.J, & de Mooij, R.A. (2000). Tax reform and the Dutch labor market: an applied general equilibrium approach. Journal of Public Economics, 78, 193–214. doi:10.1016/S0047-2727(99)00116-4