Equilibrium Worker-Firm Allocations and the Deadweight Losses of Taxation

Espen R. Moen, Jesper Bagger and Rune Vejlin

No 16735, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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; Ptimal taxation; Redistribution; Labour allocation; Job search; Job ranking; Vacancy creation; Amenities; Matched employer-employee data (search for similar items in EconPapers)
JEL-codes: H21 H30 J63 J64 (search for similar items in EconPapers)
Date: 2021-11
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Working Paper: Equilibrium Worker-Firm Allocations and the Deadweight Losses of Taxation (2021)
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