| The thesis studies the effects of taxation and Unemployment Insurance program on the labor market search and employment dynamics of high school graduates in the U.S. We develop a dynamic life-cycle model of job search with institutional features of taxes and UI benefits, and examine the interaction between them to derive the effects on the optimization problem of single agents; labor force participation decisions, consumption, asset accumulation, labor status transitions, welfare, and the reservation wage. Knowing the effect of taxation and unemployment benefit is twofold and theoretically ambiguous, we estimate the model using a sub-sample of the National Longitudinal Survey of Youth 1979 with NLSY Geocode variables, and fit the model to the data by the Simulated Method of Moments. Given the SMM estimates, we conduct several policy experiments involving changes in the benefit rates, maximum duration that the benefits can be paid, deduction amounts, and income tax rates. We find that the disincentive to work dominates the incentive effect under the current Unemployment Insurance and taxation policies. The maximum benefit-paying period extension and increase in the UI replacement rate raise search and unemployment duration, but decrease wage earnings, assets, consumption, and sacrifice individuals' Wealth in turn. Increase in tax rates raises the unemployment duration and the first accepted wages, but lowers reemployment rate, wage earnings, assets, and consumption. Allowing tax exemption at the lowest tax brackets lowers the first unemployment duration, average search duration, and first accepted wage, but raises individual wealth. The income tax effects proposed by our policy experiments more stands out in high income tax area due to the higher unemployment rate. |
