Abstract

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 equilib-rium 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 con-tains 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 re-duces long run cycles. Matching could be made more e ¢ cient by inuencing 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 uctuations in the economy.