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Income Taxation and the Equilibrium Allocation of Labor

Author

Listed:
  • Jesper Bagger

    (Royal Holloway, University of London)

  • Kazuhiko Sumiya

    (Royal Holloway, University of London)

  • Mads Hejlesen

    (Aarhus University)

  • Rune Majlund Vejlin

    (Aarhus University)

Abstract

We study the impact of labor income taxation on workers' job search behavior and the implications it has for the equilibrium allocation of labor in a complete markets equilibrium on-the-job search model with two-sided heterogeneity, endogenous job search effort and hiring intensity, equilibrium wage formation, and firm entry and exit. By appropriating part of the gain from finding a better paid job, income taxation reduces the return to job search effort, and distorts workers' job search effort, which, in turn, distorts the equilibrium allocation of labor. The model is estimated on Danish matched employer-employee data, and is used to evaluate a series of tax reforms in Denmark in the 1990s and 2000s. We find that these income tax reforms increased aggregate productivity by 2.2% through improved labor allocation, provide a novel structural decomposition of the elasticity of taxable labor income, and to identify a Pareto optimal income tax reform.

Suggested Citation

  • Jesper Bagger & Kazuhiko Sumiya & Mads Hejlesen & Rune Majlund Vejlin, 2019. "Income Taxation and the Equilibrium Allocation of Labor," 2019 Meeting Papers 841, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:841
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    References listed on IDEAS

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    Cited by:

    1. Kazuhiko Sumiya & Jesper Bagger, 2022. "Income Taxes, Gross Hourly Wages, and the Anatomy of Behavioral Responses: Evidence from a Danish Tax Reform," Economics Working Papers 2022-03, Department of Economics and Business Economics, Aarhus University.
    2. Breda, Thomas & Haywood, Luke & Wang, Haomin, 2022. "Equilibrium Effects of Payroll Tax Reductions and Optimal Policy Design," IZA Discussion Papers 15810, Institute of Labor Economics (IZA).
    3. Jean‐Baptiste Michau, 2021. "On the Provision of Insurance against Search‐Induced Wage Fluctuations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 123(1), pages 382-414, January.

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    More about this item

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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