This project involves a micro-empirical study of job changes and unemployment and the effects of taxes on labor supply. Existing theories cannot adequately explain the operation of labor markets over the business cycle, nor the impact of tax policy on aggregate employment. The first part of this study involves the development of a detailed model of the labor market, based on empirical findings concerning the role of wage differentials. This model will be used to explain the changes in worker quit rates and job turnover rates over the business cycle. The second part of the study will analyze the effects of the income tax on wages and unemployment. A simple structural model of the U.S. economy will be constructed and used to analyze the impact of tax changes. The analysis of tax changes is important because the macro economic response to a tax increase may be a significant increase in unemployment, inflation, or both. This analysis is particularly timely because of the budget deficit reductions mandated by the Gramm-Rudman-Hollings legislation which could result in significant tax increases. The work focusing on modeling the labor market should provide important new insights into the dynamics of unemployment and job turnover over the business cycle.
