This chapter has set out in detail the models which are employed below in order to analyse the labour market effects of changes in tax rates and in alterations in the tax structure. The fundamental mechanisms underlying the different approaches have been pointed out. Moreover, vital assumptions have been emphasised. By delineating the models which are used for the subsequent analyses, implicitly statements have also been made about topics or aspects which this study does not cover. For example, all workers and firms are identical ex ante. However, ex-post differences are allowed for, inter alia, if unemploy ment occurs or if some firms have to close down. These restrictions indicate areas of future research insofar as that the findings for homogeneous workers or firms yield an unambiguous proposal for changes in tax rates or the tax structure in order to promote employment. This is because it would be desir able for tax policy to know whether the predicted effects also hold in a world with ex-ante heterogeneity. Furthermore, the product market has not played a role. Therefore, repercussions from labour markets outcomes on product demand - and vice versa - are absent. 55 Moreover, neither the process of capital accumulation, be it physical or human capital, nor substitution pos sibilities between labour and capital in the firms' production function are taken into account. Finally, international competition is not modelled.

The contributors explore the reasons why involuntary unemployment happens when supply equals demand.

In the last decade, behavioral economics, borrowing from psychology and sociology to explain decisions inconsistent with traditional economics, has revolutionized the way economists view the world. But despite this general success, behavioral thinking has fundamentally transformed only one field of applied economics-finance. Peter Diamond and Hannu Vartiainen's Behavioral Economics and Its Applications argues that behavioral economics can have a similar impact in other fields of economics. In this volume, some of the world's leading thinkers in behavioral economics and general economic theory make the case for a much greater use of behavioral ideas in six fields where these ideas have already proved useful but have not yet been fully incorporated--public economics, development, law and economics, health, wage determination, and organizational economics. The result is an attempt to set the agenda of an important development in economics--an agenda that will interest policymakers, sociologists, and psychologists as well as economists. Contributors include Ian Ayres, B. Douglas Bernheim, Truman F. Bewley, Colin F. Camerer, Anne Case, Michael D. Cohen, Peter Diamond, Christoph Engel, Richard G. Frank, Jacob Glazer, Seppo Honkapohja, Christine Jolls, Botond Koszegi, Ulrike Malmendier, Sendhil Mullainathan, Antonio Rangel, Emmanuel Saez, Eldar Shafir, Sir Nicholas Stern, Jean Tirole, Hannu Vartiainen, and Timothy D. Wilson.

This volume seeks to go beyond the microeconomic view of wages as a cost having negative consequences on a given firm, to consider the positive macroeconomic dynamics associated with wages as a major component of aggregate demand.

The Wage Curve casts doubt on some of the most important ideas in macroeconomics, labor economics, and regional economics. According to macroeconomic orthodoxy, there is a relationship between unemployment and the rate of change of wages. According to orthodoxy in labor economics and regional economics an area's wage is positively related to the amount of joblessness in the area. The Wage Curve suggests that both these beliefs are incorrect. Blanchflower and Oswald argue that the stable relationship is a downward-sloping convex curve linking local unemployment and the level of pay. Their study, one of the most intensive in the history of social science, is based on random samples that provide computerized information on nearly four million people from sixteen countries. Throughout, the authors systematically present evidence and possible explanations for their empirical law of economics.