X(1) = (h H + l L - b B / R(1)) / (h + l) (5-1)
There is a set of critical levels of gross income M(t) = M(R(t), t), such that unemployment results iff earnings L are less than M(t). This follows directly from rule (iii-b). This critical income solves from:
M(t) - T(M(t), t)
B
M(t) = M(R(t), t) = (B - R(t) X(t)) / (1 - R(t)) (6-t)
Under unemployment, the benefits cause additional taxes l.B which are levied on a smaller tax base. Given that l are unemployed anyway, the tax exemption X(0) can be lowered, so that the marginal rate is as low as possible. This has the effect that M(0) shifts to the right, so that the gap between the possible wage L and the wage ‘required for a decent living’ widens. There is obviously hysteresis, of a ‘catastrophic’ kind. Conversely, M(1) can range in B
M(1)