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Taxation, Redistribution and Frictional Labor Supply


  • Hakki Yazici

    (Sabanci University)

  • Christopher Sleet

    (Carnegie Mellon University)


We analyze the implications of ex ante dispersion in worker talents and a frictional labor market for the design of tax and benefit systems. Our model features on and off the job search, job ladders and equilibrium income and profit dispersion within talent markets. In a baseline setting with no talent dispersion, the optimal system consists of an unemployment benefit financed out of a simple lump sum tax on workers. The benefit is high enough to suppress worker income and firm profit dispersion, deter worker poaching and collapse job ladders. With talent dispersion, high benefit levels drive less talented workers out of the market and are prohibitively costly. Active talent markets are frictional. Taxes impact the dispersion of worker incomes and firm profits within these markets. These effects shape and modify conventional optimal tax formulas.

Suggested Citation

  • Hakki Yazici & Christopher Sleet, 2017. "Taxation, Redistribution and Frictional Labor Supply," 2017 Meeting Papers 298, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:298

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    Cited by:

    1. Doligalski, Pawel & Werquin, Nicolas & Ndiaye, Abdoulaye, 2020. "Redistribution with Performance Pay," TSE Working Papers 20-1092, Toulouse School of Economics (TSE).
    2. Thibaut Lamadon & Magne Mogstad & Bradley Setzler, 2019. "Imperfect competition, compensating differentials and rent sharing in the U.S. labor market," Discussion Papers 918, Statistics Norway, Research Department.
    3. Jesper Bagger & Espen Moen & Rune Vejlin, 2018. "Optimal Taxation with On-the-Job Search," 2018 Meeting Papers 805, Society for Economic Dynamics.

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