Vol. 18, No. 1

Marja-Liisa Halko:
Financing of Unemployment Insurance under Wage Bargaining (pp. 3–15)

Abstract In conventional trade union models, it is assumed that the unemployment benefits of the unemployed union members are provided by the government. We examine the case where in a right-to-manage model, the union finances part of the benefits of its unemployed members and therefore runs an unemployment insurance (UI) fund, to which employed members pay insurance premiums. Part of the fund’s income derives from the UI taxes the government imposes on both employees and employers. In this paper, we show that wages fall and employment rises when the government increases the experience rating or decreases unemployment benefits. A rise in profit tax also increases employment, but changes in UI taxes on the payroll or income have no employment effect.
(JEL: J51, J65)

Mika Kuismanen:
Labour Supply and Income Taxation: Estimation and Simulation Exercise for Finland (pp. 16–30)

It is well known that the estimation of a labour supply function is complicated because of the non-linear budget constraint an individual faces. This non-linearity may arise from a variety of reasons – the structure of the tax/benefit scheme, overtime rates etc. Non-linearities also cause problems when it comes to interpreting the policy implications of the estimates. In this study we first estimate two well-structured econometric labour supply models which mimic the actual budget constraints as closely as possible. Utilising estimation results we construct a microsimulation model to analyse different income tax regimes and systems to the labour supply. Our simulation results show that none of the proposed reforms are self-financing. A revenue neutral proportional tax system does not have major effects on labour supply. The biggest behavioural responses are achieved if we reduce the marginal tax rates from the lower end of the state income tax schedule.(JEL: H24, J22, C31)

Petri Mäki-Fränti:
Should the ECB respond to exchange rates? (pp. 31–46)

Abstract Using a structural, quantitative macro model, this paper investigates benefits of including the real exchange rate of the euro into the monetary policy rule of the European Central Bank (ECB). The problem is considered from viewpoints of both the whole monetary union and a single member state with a national economy more open and facing different structural shocks than the union economy on average. According to the results, the union would benefit more from the exchange rate stabilisation than the member state, when the exchange rate response is set to minimise the loss function calculated for the whole monetary union. Only with rather high exchange rate response by the central bank, would the gain for the member state be larger. Moreover, also when it comes to central bankʼs responses to inflation and output, the common monetary policy does not fit the member state very well. The union as a whole would benefit from central bankʼs relatively stronger response to output than inflation, while for the member state the weights of inflation and output in the policy rule should be set the other way round.

(JEL: E32, E52, E58, F42)

Finnish Economic Papers 1/2005