Unemployment Benefits as Redistribution Scheme of Trade Gains - a Positive Analysis

Abstract

Trade liberalization is no Pareto-improvement - there are winners (high-skilled) and losers (low-skilled).To compensate the losers the government is assumed to introduce unemployment benefits (UB).These benefits are financed by either a wage tax, a payroll tax, or a profitax. Using a Melitz -type model of international trade with unionized labor markets and heterogeneous workers we show that: (i) there is a threshold level of UB where all trade gains are destroyed, (ii) this threshold differs between different kind of taxes, (iii) there is a clear cut ranking in terms of welfare for the chosen funding of the UB: 1. wagetax, 2. profittax, 3. payroll tax.