Monopsony Amplifies Distortions from Progressive Taxes

David Berger, Kyle F. Herkenhoff, Simon Mongey and Negin Mousavi

No 31972, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this short paper we show that progressive income taxes distort hiring and wages when firms have labor market power. From a firm’s perspective, raising pre-tax wages increases employment by less when taxes are progressive as less of the pre-tax wage is paid to workers. Understanding this when setting wages leads to lower wages and employment at all firms. When firms differ in productivity, progressive taxes also distort the allocation of labor across firms. We characterize this novel monopsony cost of progressivity in a simple monopsony economy and derive efficiency wedges that depend on progressivity. A simple quantification of these wedges points to the possibility that the monopsony cost may be of similar magnitudes to redistribution and insurance benefits.

JEL-codes: E0 H0 J0 (search for similar items in EconPapers)
Date: 2023-12
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Published as David Berger & Kyle Herkenhoff & Simon Mongey & Negin Mousavi, 2024. "Monopsony Amplifies Distortions from Progressive Taxes," AEA Papers and Proceedings, vol 114, pages 555-560.

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