Pareto-Improving Unemployment Policies

We investigate how continental European unemployment can be reduced without reducing unemployment benefits and without reducing the net income of low-wage earners. Lower unemployment replacement rates reduce unemployment, the net wage, and unemployment benefits. A lower tax on labor increases net wages and unemployment benefits. Combining these two policies allows one to reduce unemployment without reducing the net income of workers or of the unemployed. Such a policy becomes self-financing under realistic parameter constellations when taxes are reduced only for low-income workers.