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Welfare Implications Of Factor Taxation With Rising Wage Inequality

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  • Blankenau, William F.
  • Ingram, Beth F.

Abstract

In recent decades, the structure of wages in the U.S. economy has shifted to favor workers with college degrees over those without college degrees. Concurrently, there has been an increase in the share of the workforce that is college educated. We build an overlapping generations model in which skill-biased technological change drives both rising wage inequality and a rising percentage of skilled (educated) workers in the labor force. We explore the implications for agent welfare and for the distribution of income of different factor taxation choices. We find that higher tax rates on capital and lower tax rates on unskilled labor can yield steady-state welfare gains across a heterogeneous population, and that these gains increase as the economy experiences technological change that favors skilled labor. Moreover, these shifts in taxation can lower net wage inequality. Steady-state welfare gains, however, come at the expense of agents alive upon implementation.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 6 (2002)
Issue (Month): 03 (June)
Pages: 408-428

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Handle: RePEc:cup:macdyn:v:6:y:2002:i:03:p:408-428_00

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Cited by:
  1. Hui He & Zheng Liu, 2007. "Investment-specific technological change, skill accumulation, and wage inequality," Working Papers 644, Federal Reserve Bank of Minneapolis.
  2. Hui He & Zheng Liu, 2006. "Investment-specific Technical Change and the Dynamics of Skill Accumulation and Wage Inequality," Emory Economics 0609, Department of Economics, Emory University (Atlanta).
  3. Linnea Polgreen & Pedro Silos, 2008. "Capital-Skill Complementarity and Inequality: A Sensitivity Analysis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 302-313, April.
  4. Elizabeth M. Caucutt & Selahattin Imrohoroglu & Krishna B. Kumar, 2000. "Does the progressivity of taxes matter for economic growth?," Discussion Paper / Institute for Empirical Macroeconomics 138, Federal Reserve Bank of Minneapolis.
  5. Lutz, Stefan & Turrini, Alessandro, 2006. "A general equilibrium model with vertically differentiated industries, skilled labour and trade," Economic Modelling, Elsevier, vol. 23(1), pages 1-19, January.
  6. Blankenau, William, 2005. "Public schooling, college subsidies and growth," Journal of Economic Dynamics and Control, Elsevier, vol. 29(3), pages 487-507, March.

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