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Good Jobs, Bad Jobs and Redistribution

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  • Kjell Erik Lommerud
  • Bjørn Sandvik
  • Odd Rune Staume

Abstract

We analyse the question of optimal taxation in a dual economy, when the government is concerned about the distribution of labour income. Income inequality is caused by the presence of sunk capital investments, which creates a ‘good jobs’ sector due to the capture of quasi-rents by trade unions. We find that whether the government should subsidise or tax investments is crucially dependent on union bargaining strength. If unions are weak, the optimal tax policy implies a combination of investment taxes and progressive income taxation. On the other hand, if unions are strong, we find that the best option for the government is to use investment subsidies in combination with either progressive or proportional taxation, the latter being the optimal policy if the government is not too concerned about inequality and if the cost of income taxation is sufficiently high.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1022.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_1022

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Keywords: rent sharing; segmented labour markets; optimal taxation; redistribution;

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Citations

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Cited by:
  1. Christian Merkl & Dennis J. Snower, 2007. "Escaping the Unemployment Trap � The Case of East Germany," Kiel Working Papers 1309, Kiel Institute for the World Economy.
  2. Merkl, Christian & Snower, Dennis J., 2008. "Escaping the unemployment trap: The case of East Germany," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 542-556, December.
  3. Belan, Pascal & Gregoir, Stéphane & Carré, Martine, 2009. "Subsidizing low-skilled jobs in a dual labor market," Economics Papers from University Paris Dauphine 123456789/8134, Paris Dauphine University.
  4. Jörg Lingens & Klaus Wälde, 2009. "Pareto-Improving Unemployment Policies," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(2), pages 220-245, June.
  5. Kessing, Sebastian G. & Konrad, Kai A., 2006. "Union strategy and optimal direct taxation," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 393-402, January.
  6. Silvia Rocha-Akis, 2012. "The Pain and Gain of Offshoring: The Effects of Tax Progression in a Segmented Labour Market," CESifo Working Paper Series 3739, CESifo Group Munich.
  7. Mireia Valverde & Gerard Ryan & María Gorjup, 2007. "An Examination of the Quality of Jobs in the Call Center Industry," International Advances in Economic Research, Springer, vol. 13(2), pages 146-156, May.
  8. Marco de Pinto, 2012. "The Redistribution of Trade Gains and the Equity-Efficiency Trade-Off," IAAEU Discussion Papers 201206, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).

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