Tax policies and unemployment in a dynamic efficiency wage model

In this paper we make a dynamic analysis of the effects of various tax policies on the unemployment of an economy with a labour-efficiency function which shifts over time. Stock of knowledge, which is produced as a durable public good, accumulates over time; and the efficiency of the worker varies positively with the stock of knowledge in addition to wage and unemployment. We analyze the accumulation of physical capital and human capital stock (stock of knowledge) and the properties of long-run equilibrium of the system. The comparative steady-state effects on unemployment with respect to change in various tax rates are analyzed assuming that the production of the public good (educational output) is financed by the tax revenue, In many cases, these results are different from the corresponding comparative static results.