Working Paper: NBER ID: w18151
Authors: Mikhail Golosov; Pricila Maziero; Guido Menzio
Abstract: This paper studies the optimal redistribution of income inequality in a model with search and matching frictions in the labor market. We study this problem in the context of a directed search model of the labor market populated by homogeneous workers and heterogeneous firms. The optimal redistribution in this model, which is associated with the constrained efficient allocation, can be attained using a positive unemployment benefit and an increasing and regressive labor income tax. The positive unemployment benefit serves the purpose of lowering the search risk faced by workers. The increasing and regressive labor tax serves the purpose of aligning the cost to the firm of attracting an additional applicant with the value of an application to society.
Keywords: Income Inequality; Taxation; Labor Market; Redistribution
JEL Codes: H21; J64; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unemployment benefit (J65) | lowers search risk (G14) |
| lowers search risk (G14) | increases expected utility from job searching (D11) |
| labor income tax (H31) | aligns cost to firms with societal value of job applications (J68) |
| labor income tax (H31) | optimal redistribution of income among workers (D33) |