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Optimal Redistributive Taxation with both Labor Supply and Labor Demand Responses

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  • Laurence Jacquet
  • Etienne Lehmann
  • Bruno Van der Linden

Abstract

This paper characterizes the optimal redistributive tax schedule in a matching unemployment framework where (voluntary) nonparticipation and (involuntary) unemployment are endogenous. The optimal employment tax rate is given by an inverse employment elasticity rule. This rule depends on the global response of the employment rate, which depends not only on the participation (labor supply) responses, but also on the vacancy posting (labor demand) responses and on the product of these two responses. For plausible values of the parameters, our matching environment induces much lower employment tax rates than the usual competitive model with endogenous participation only.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3779.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3779

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Keywords: optimal taxation; labor market frictions; unemployment; Kalai solution;

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References

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  1. David Lee & Emmanuel Saez, 2008. "Optimal Minimum Wage Policy in Competitive Labor Markets," NBER Working Papers 14320, National Bureau of Economic Research, Inc.
  2. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 50(1), pages 3-50, March.
  3. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  4. Barbara Petrongolo & Christopher A. Pissarides, 2000. "Looking Into the Black Box: A Survey of the Matching Function," CEP Discussion Papers, Centre for Economic Performance, LSE dp0470, Centre for Economic Performance, LSE.
  5. Hungerbühler, Mathias & Lehmann, Etienne, 2007. "On the Optimality of a Minimum Wage: New Insights from Optimal Tax Theory," IZA Discussion Papers 2957, Institute for the Study of Labor (IZA).
  6. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  7. Herwig Immervoll & Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2007. "Welfare reform in European countries: a microsimulation analysis," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 117(516), pages 1-44, 01.
  8. Meghir, Costas & Phillips, David, 2008. "Labour Supply and Taxes," IZA Discussion Papers 3405, Institute for the Study of Labor (IZA).
  9. Emmanuel Saez, 2000. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," NBER Working Papers 7708, National Bureau of Economic Research, Inc.
  10. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  11. L'Haridon, Olivier & Malherbet, Franck & Pérez-Duarte, Sébastien, 2010. "Does bargaining matter in the small firm's matching Mmodel?," Les Cahiers de Recherche 938, HEC Paris.
  12. Etienne, LEHMANN & Alexis, PARMENTIER & Bruno, VAN DER LINDEN, 2008. "Optimal income taxation with endogenous participation and search unemployment," Discussion Papers (ECON - Département des Sciences Economiques), Université catholique de Louvain, Département des Sciences Economiques 2008036, Université catholique de Louvain, Département des Sciences Economiques.
  13. Mathias Hungerb�hler & Etienne Lehmann & Alexis Parmentier & Bruno Van Der Linden, 2006. "Optimal Redistributive Taxation in a Search Equilibrium Model," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 743-767.
  14. Sheshinski, E. & Diamond, P., 1992. "Economic Aspects of Optimal Disability Benefits," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 92-5, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. Boadway, Robin & Cuff, Katherine & Marceau, Nicolas, 2003. "Redistribution and employment policies with endogenous unemployment," Journal of Public Economics, Elsevier, Elsevier, vol. 87(11), pages 2407-2430, October.
  16. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 25-49, March.
  17. Jesse Rothstein, 2010. "Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence," American Economic Journal: Economic Policy, American Economic Association, American Economic Association, vol. 2(1), pages 177-208, February.
  18. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262161877, December.
  19. Kalai, Ehud, 1977. "Proportional Solutions to Bargaining Situations: Interpersonal Utility Comparisons," Econometrica, Econometric Society, Econometric Society, vol. 45(7), pages 1623-30, October.
  20. Boone, J. & Bovenberg, A.L., 2000. "Optimal Labour Taxation and Search," Discussion Paper, Tilburg University, Center for Economic Research 2000-17, Tilburg University, Center for Economic Research.
  21. Choné, Philippe & Laroque, Guy, 2011. "Optimal taxation in the extensive model," Journal of Economic Theory, Elsevier, Elsevier, vol. 146(2), pages 425-453, March.
  22. Guesnerie, Roger & Roberts, Kevin, 1987. "Minimum wage legislation as a second best policy," European Economic Review, Elsevier, Elsevier, vol. 31(1-2), pages 490-498.
  23. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, Elsevier, vol. 13(1), pages 101-110, February.
  24. Philippe Chone & Guy Laroque, 2001. "Optimal Incentives for Labor Force Participation," Working Papers, Centre de Recherche en Economie et Statistique 2001-26, Centre de Recherche en Economie et Statistique.
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  26. repec:bla:restud:v:73:y:2006:i:3:p:743-767 is not listed on IDEAS
  27. Paul Beaudry & David A. Green & Benjamin M. Sand, 2010. "How Much Is Employment Increased by Cutting Labor Costs? Estimating the Elasticity of Job Creation," NBER Working Papers 15790, National Bureau of Economic Research, Inc.
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Cited by:
  1. Lichter, Andreas & Peichl, Andreas & Siegloch, Sebastian, 2014. "The own-wage elasticity of labor demand: A meta-regression analysis," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 14-016, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española, IEF, IEF, vol. 200(1), pages 15-39, March.

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