A Negative Income Tax in a Partly Unionised Economy

In many economies the level of unemployment pay sets a floor to the wage rate. The interaction of the tax and social security systems , yielding effective marginal tax rates of around 100% for some low paid workers, eliminates the incentive to take a job at a wage less than some critical level. If the marginal product of labour at full employment is less than this critical wage, unemployment will result. This unemployment is involuntary in the sense that jobs are available at which the marginal product of labour exceeds the marginal disutility of labour and remain unfilled because of the tax/social security system.