Three Theorems on Inflation Taxes and Marginal Employment Subsidies

Abstract

The paper studies the microeconomic theory of inflation taxes and marginal employment subsidies. It proves that under very weak assump- tions (i) an inflation tax will reduce the 1ong—run equilibrium wage or price and (ii) that a marginal employment subsidy will raise the long- run equilibrium employment level. The theorems, which show the policies’ formal similarities, are illustrated with examples. One caveat is also raised: in a competitive industry (rather than a single firm), with free entry and exit, a marginal employment subsidy might reduce the total number of jobs. The paper also proves (iii) that in special circumstances a tax on inflation is exactly equivalent to a marginal employment subsidy.