Equilibrium unemployment in a general equilibrium model with taxes

The ratio of unemployed to vacancies has risen sharply in the UK after the recession of 2008/09. How harmful is it for the long run growth, equity and e¢ ciency and what sorts of long run cycles does it generate in the economy? With a dynamic computable general equilibrium model with Pissarides (1979, 2011) and Mortensen and Pissarides (1994) type equilibrium unemployment, impacts of tax-transfer programmes are assessed for the UK. The model contains more desirable structure of households and production sectors and includes more type of shocks in preferences, technology, trade and policy instruments for stochastic analyses than is usual in DSGE models. It assesses growth and cycles as well as equity and e¢ ciency e§ects of policies simultaneously. Improvements in the matching technology lowers the equilibrium unemployment and raises the long-run growth rate and life time utilities of households and reduces long run cycles. Matching could be made more e¢ cient by ináuencing the relative price system by optimal set of tax and transfer instruments. Better matching techniques can make transition of job-seekers to employment more e¢ cient so that the intertemporal labour-leisure and consumption-saving decisions have greater impacts on growth and redistribution reducing áuctuations in the economy