Monopoly union, unemployment benefits and labour taxes: the unemployment problem revisited

Unemployment is undoubtedly one of the most important concerns in developed countries, especially in Europe. Most of the related economic literature has discussed the possible influence of unemployment benefits on unemployment and welfare, assuming a lump-sum type benefit system, while the more realistic earnings-related (replacement rate) regime has been scarcely considered. Applying a fairly standard monopoly union model, we show that when unemployment benefit is related to the existing wage, the rate of unemployment can be reduced by increasing both the replacement rate and the labour tax.