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Optimal Tax Credits in the Context of the German System of Apprenticeship Training and Social Security

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  • Kai-Joseph Fleischhauer

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    Abstract

    There is an ongoing discussion in Germany about the implementation of tax credits in order to reintegrate low-skilled workers into the labor market. This paper aims at analyzing the policy instrument of tax credits in a theoretical model that systematically compares its costs and benefits in the context of the German system of apprenticeship training and social security. Building on recent training literature, a two-period partial-equilibrium model is developed that allows for worker heterogeneity in ability. In our model, the implementation of tax credits in terms of a negative income tax solves a trade-off with respect to overall welfare. While tax credits reduce the number of unemployed workers at the extensive margin, they increase at the same time the opportunity costs of apprenticeship training, which implies that human capital formation is decreased. Furthermore, the model suggests that the reintegration of those workers at the bottom of the ability-distribution into the labor market is not optimal. The additional implementation of minimum wages is counteractive to the reduction of unemployment because firms would thus be prevented from employing workers with very low productivities.

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    File URL: http://www1.vwa.unisg.ch/RePEc/usg/dp2006/DP21_Fl.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2006 with number 2006-21.

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    Length: 40 pages
    Date of creation: Sep 2006
    Date of revision:
    Handle: RePEc:usg:dp2006:2006-21

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    Related research

    Keywords: Unemployment of Low-Skilled Workers; Tax Credits; Labor Supply; Human Capital Formation;

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    1. Nada Eissa & Hilary W. Hoynes, 2006. "Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply," NBER Chapters, in: Tax Policy and the Economy, Volume 20, pages 73-110 National Bureau of Economic Research, Inc.
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