Paper #559

Title:

Income taxation in a frictional labor market

Author:

Joel Shapiro

Date:

June 2001

Abstract:

A new model of wage dispersion is used to examine welfare aspects of income taxation. The model retains the dynamics of wage posting models while exogenizing search e¤ort, therefore allowing more insight into policy issues. The results highlight effects that standard analyses do not take into account. The optimal income tax should depend on an incidence effect between workers and firms. This incidence effect arises from firms trying to lower wages as much as possible. An employment tax proves, in certain cases, to be the best method to encourage labor force participation.

Keywords:

Wage posting, optimal income taxation, search

JEL codes:

D83,H21,H22

Area of Research:

Microeconomics

Published in:

Journal of Public Economics, Volume 88, Issues 3-4, pp. 465-479, March 2004

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