Equilibrium Worker-Firm Allocations and the Deadweight Losses of Taxation

Jesper Bagger (), Espen R. Moen () and Rune Vejlin
Additional contact information
Jesper Bagger: University of Edinburgh
Espen R. Moen: Norwegian Business School (BI)

No 14865, IZA Discussion Papers from Institute of Labor Economics (IZA)

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: vacancy creation; job ranking; job search; labour allocation; redistribution; optimal taxation; deadweight loss; amenities; matched employer-employee data (search for similar items in EconPapers)
JEL-codes: H21 H30 J63 J64 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2021-11
New Economics Papers: this item is included in nep-dge, nep-lab and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://docs.iza.org/dp14865.pdf (application/pdf)

Related works:
Working Paper: Equilibrium Worker-Firm Allocations and the Deadweight Losses of Taxation (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp14865

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().