Working Paper: CEPR ID: DP16735
Authors: Jesper Bagger; Espen R. Moen; Rune Vejlin
Abstract: We analyse the deadweight losses of tax-induced labor misallocation in an equilibrium model of the labour market where workers search to climb a job ladder and firms post vacancies. Workers differ in abilities. Jobs differ in productivities and amenities. A planner uses affine tax functions to finance lump-sum transfers to all workers and unemployment benefits. The competitive search equilibrium maximizes after-tax utility subject to resource constraints and the tax policy. A higher tax rate distorts search effort, job ranking and vacancy creation. Distortions vary on the job ladder, but always result in deadweight losses. We calibrate the model using matched employer-employee data from Denmark. The marginal deadweight loss is 33 percent of the tax base, and primarily arise from distorted search effort and vacancy creation. Steeply rising deadweight losses from distorted vacancy creation imply that the deadweight loss in the calibrated economy exceeds those incurred by very inequality averse social planners.
Keywords: deadweight loss; optimal taxation; redistribution; labour allocation; job search; job ranking; vacancy creation; amenities; matched employer-employee data
JEL Codes: H21; H30; J63; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher tax rates (H29) | Decreased search among unemployed workers (J64) |
| Higher tax rates (H29) | Reduced tax base (H29) |
| Taxation (H20) | Alters job ranking (J62) |
| Taxation alters job ranking (H29) | High-amenity, low-productivity jobs more attractive (J68) |
| Taxation (H20) | Impacts vacancy creation (J63) |
| Higher taxes (H29) | Excessive vacancy creation in high-productivity, low-amenity jobs (J69) |
| Excessive vacancy creation in high-productivity, low-amenity jobs (J69) | Deadweight losses (H21) |