Equity and Efficiency in Rationed Labor Markets

Aart Gerritsen

Working Papers from Max Planck Institute for Tax Law and Public Finance

Abstract: The social welfare implications of income tax policy are shown to critically depend on whether or not labor markets are rationed – i.e., on the existence of involuntary unemployment. With rationed labor markets, raising taxes on the employed and transfers towards the unemployed might improve both equity and efficiency. It improves equity by redistributing income from the employed to the unemployed; it improves efficiency as it encourages people with a small utility surplus of employment to exit the labor market, leaving their jobs for people with a higher utility surplus. I derive conditions under which this result continues to hold when only part of the labor market is rationed. I also show that conventional tax incidence results break down in rationed labor markets.

Keywords: Involuntary unemployment; inefficient rationing; optimal taxation (search for similar items in EconPapers)
JEL-codes: E24 H21 J21 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016-03
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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