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Title:: Progressive Personal Income Tax, Unemployment Hysteresis and Fluctuations of Chinese Labor Market: From the Perspective of NW-DSGE

Abstract:: Based on the New Keynesian Dynamic Stochastic General Equilibrium model which covers progressive personal income tax, this paper investigates the influences of progressive personal income on Chinese labor market. Studies show that the introduction of progressive personal income has brought about alterations in mechanisms of fiscal and monetary policies for the labor market. The divine coincidence no longer exists, and the slope of New Keynesian Wage Philips Curve is changed. Results of full sample Bayesian shock decomposition show that there is serious unemployment hysteresis in China, accounting for our perennial problem of unemployment. The sub-sample sensitivity analysis, which proves the validity of the above-mentioned results, has found that progressive personal income plays an active role in stabilizing the labor market. On this basis, the paper concludes that we should adopt a monetary policy mechanism similar to the Evans rule which can respond to the labor market, and make some adjustments to progressive income tax policy. These moves will help lower the unemployment rate, stabilize the labor market, and reduce welfare losses caused by the single monetary policy.