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Selective Reductions in Labor Taxation: Labor Market Adjustments and Macroeconomic Performance

  • Batyra, Anna

    ()

    (Université catholique de Louvain)

  • Sneessens, Henri R.

    ()

    (University of Luxembourg)

We use a calibrated general equilibrium model with heterogeneous labor and search to evaluate the quantitative effects of various labor tax cut scenarios. The focus is on skill heterogeneity combined with downward wage rigidities at the low end of the skill ladder. Workers can take jobs for which they are overeducated. We compare targeted and non-targeted tax cuts, both with or without over-education effects. Introducing over-education changes substantially the employment, productivity and welfare effects of a tax cut, although tax cuts targeted on the least skilled workers always have larger effects.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5013.

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Length: 15 pages
Date of creation: Jun 2010
Date of revision:
Publication status: published in: Journal of Policy Modeling, 2010, 32 (4), 531–543
Handle: RePEc:iza:izadps:dp5013
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