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Higher Tax and Less Work: An Optimal Response to Relative Income Concern

Felix FitzRoy (), Jim Jin () and Michael A. Nolan ()
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Felix FitzRoy: University of St. Andrews
Jim Jin: University of St. Andrews
Michael A. Nolan: University of Hull

No 12468, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: There is much evidence that relative income concern reduces subjective wellbeing and raises labour supply – 'keeping up with the Joneses' (KUJ), while increasing use of social media and growing inequality encourage comparison. Models with one or two agent –types generally miss the policy relevant dimension of labour force participation, so we include a distribution of wages with intensive and extensive margins of labour supply, both of which are increased by comparison. The optimal tax response increases with comparison, but, surprisingly, dominates the comparison effect and reduces individual labour supply, thus reversing KUJ, and maintains constant employment, independent of comparison.

Keywords: income comparison; maxi-min; inequality; unemployment (search for similar items in EconPapers)
JEL-codes: H24 D63 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2019-07
New Economics Papers: this item is included in nep-hap, nep-pay, nep-pbe and nep-pub
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