The optimal taxation of unskilled labor with job search and social assistance

In order to explore the optimal taxation of low-skilled labor, we extend the standard model of optimal nonlinear income taxation in the presence of quasi-linear preferences in leisure by allowing for involuntary unemployment, job search and an exogenous welfare benefit. In trading off low-skilled employment against work effort of higher skilled workers, the government balances distortions on the search margin with those on work effort. Higher welfare benefits typically reduce taxes paid by low-skilled workers and raise marginal tax rates throughout the skill distribution.     

Optimal Redistributive Income Taxation and Efficiency Wages*

In this paper, we integrate efficiency wage setting with the theory of optimal redistributive income taxation. In doing so, we use a model with two skill types, where efficiency wage setting characterizes the labor market faced by the low‐skilled, whereas the high‐skilled face a conventional, competitive labor market. We show that the marginal income tax implemented for the high‐skilled is negative under plausible assumptions. The marginal income tax facing the low‐skilled can be either positive or negative, in general. An increase in unemployment benefits contributes to a relaxation of the binding self‐selection constraint, which makes this instrument particularly useful from the perspective of redistribution.     

Wage endogeneity,tax evasion,and optimal nonlinear income taxation

This paper studies the interaction between tax evasion and wage endogeneity within a Mirrleesian optimal tax framework. It characterizes the optimal marginal income tax rates on the skilled and the unskilled workers and the optimal amount of resources to be spent on deterring tax evasion. It shows that tax evasion weakens the incentives for the government to manipulate the marginal tax rates for the purpose of exploiting general equilibrium effects on wages. Moreover, the extent of this depends on the curvature of the evasion cost function. It also argues that marginal income tax rates are likely to be higher when the government attempts to deter evasion.     

Optimal unemployment insurance and redistribution

We characterize optimal income taxation and unemployment insurance in a search‐matching framework where both voluntary and involuntary unemployment are endogenous and Nash bargaining determines wages. Individuals decide whether to participate as job seekers and if so, how much search effort to exert. Unemployment insurance trades off insurance versus search and participation incentives. We also allow for different productivity types so there is a redistributive role for the income tax and show that a piecewise linear wage tax internalizes the macro effects arising from endogenous wages. Type‐specific lump‐sum taxes and transfers can then redistribute between individuals of differing skills and employment states. Our analysis embeds optimal unemployment insurance into an extensive‐margin optimal redistribution framework where transfers to the involuntarily and voluntarily unemployed can differ, and nests several standard models in the literature.     

Implicit contracts with effort incentives

The model combines the principal-agent approach with the analysis of labor contracts under demand uncertainty. Given the necessity to impose effort incentives the optimal contract is shown to maintain an efficient insurance with respect to the demand uncertainty and the employment risk. However, this efficient insurance may now yield either voluntary or involuntary layoff unemployment. Further, the optimal effort levels entail “underemployment” given adominant strategy incentive mechanism as well as under aNash-equilibrium mechanism. In contrast, the optimal employment levels fall short of achieving efficient production only in the latter case.     

效率工资理论的新发展：阿克洛夫的观点

阿克洛夫的效率工资理论,通过吸收社会学、人类学的研究成果,将人的劳动行为看成基于公平出发的社会习俗。根据这一习俗,企业支付的工资不少于工人预期的公平工资,而工人根据企业支付的工资决定自己的努力程度,从而决定自己的边际产出。对于追求利润最大化的企业来说,并非支付的工资越高越好,支付工人的工资应等于工人的边际产出。当公平工资高于市场出清工资时,非自愿失业问题出现,工人技术程度与其失业率负相关。二元劳动力市场的现实与人类内生的行为规范,使得非自愿失业问题的解决前景十分悲观。     

Environmental Goods and Measures for Their Promotion: An Analysis Using a Fair Wage Model

In this paper, we model a two‐sector small open economy with emissions and unemployment associated with the fair wage effort hypothesis, and investigate the environmental and employment impact of an emission tax, a subsidy for purchasing environmental goods in the downstream polluting industry, and a subsidy to the upstream eco‐industry. We then show that if the eco‐industry is skilled labor intensive relative to the polluting final goods industry, while a subsidy for purchasing environmental goods decreases the unemployment rate of unskilled labor, it may increase total emissions. In contrast, the emission tax and the subsidy to eco‐industry firms worsen the unemployment rate, though both policies decrease total emissions. Hence, if the emission tax is set equal to the marginal environmental damage, and either a downstream or upstream subsidy is used to mitigate unskilled unemployment, the optimal subsidy to purchase the goods is positive whereas the optimal subsidy to the eco‐industry is negative, i.e., a tax on the eco‐industry.     

Regulating an externality-generating public utility: A multi-dimensional screening approach

In this paper, I present a monopoly screening model in which a firm holds private information on fixed abatement costs. Because of the nature of the optimal contracts, bunching is never optimal even with ‘n’ distinct types. A characterization of full and limited information solutions is offered and it is shown that the design standards alone determine the value of an information rent. The variable charge is completely free of any marginal information costs. This allows the variable charge to track marginal damages and thereby ensures that marginal social costs are covered. A fixed charge implements the optimal solution.     

Second‐Best Taxation of Incomes and Non‐Labor Inputs in a Model with Endogenous Wages

This paper considers a Mirrleesian optimal income tax model wherein labor inputs are not perfect substitutes and their wages are determined endogenously. It shows: (i) If skilled and unskilled workers are Edgeworth complements, skilled workers will necessarily face a marginal subsidy and unskilled workers a marginal tax on their incomes (these may not be the case if skilled and unskilled workers are Edgeworth substitutes); and (ii) redistributive concerns call for taxation of those inputs whose elasticity of complementarity with skilled labor is larger than with unskilled labor, and subsidization of those whose elasticity of complementarity is smaller.     

Integration of unemployment insurance with retirement insurance

This paper analyzes a social insurance system that integrates unemployment insurance with a pension program, allowing workers to borrow against their future wage income to finance consumption during an unemployment episode and thus improving search incentives while reducing the risks arising from unemployment. This paper identifies the conditions under which integration improves welfare and the factors which determine the optimal degree of integration. We show that when the duration of unemployment is very short compared to the period of employment or retirement, the optimal system involves exclusive reliance on pension-funded self-insurance. This system imposes a negligible risk burden for workers while avoiding attenuating search incentives. We also argue that joint integration of several social insurance programs with a pension program through an individual account is desirable unless the risks are perfectly correlated with each other.     

Welfare states and unemployment

Summary This paper studies equilibrium unemployment in a search model where the government both provides liberal unemployment insurance and taxes labor at high progressive tax rates. It is shown how progressive income taxation can counteract a high unemployment rate under generous unemployment insurance. In particular, high marginal taxes reduce workers' incentives to switch jobs in response to changing economic opportunities. This lower labor mobility reduces unemployment but at the cost of a less efficient labor allocation.We are grateful to William Dupor, Krishna Kumar, and Ashok Rai for excellent computer programming.     

Education,unemployment and migration

This paper studies a two-region model in which unemployment, education decisions and interregional migration are endogenous. The poorer region exhibits both lower wages and higher unemployment rates, and migrants to the richer region are disproportionally skilled. The brain drain from the poor to the rich region is accompanied by stronger incentives to acquire skills even for immobile workers. Regional shocks tend to affect both regions in a symmetric fashion, and skill-biased technological change reduces wages of the unskilled. Both education and migration decisions are distorted by a uniform unemployment compensation, which justifies a corrective subsidization.     

Redistribution and employment policies with endogenous unemployment

We study optimal redistribution policy in an economy with three types of unemployed persons: those unable to work, the voluntarily unemployed, and the involuntarily unemployed. Both voluntary and involuntary unemployment are endogenous. Voluntary unemployment arises because individuals have different preferences, while involuntary unemployment results from frictions in the labour market or from an efficiency wage. We consider the employment policies of a well-informed government when it can and cannot commit to its policies. The model is simple, yet rich enough to reflect real-world policies, including transfers to the disabled, welfare for non-working employables, unemployment insurance, employment subsidies, and taxes on workers and firms.     

Worst-case optimal redistribution of VCG payments in multi-unit auctions

For allocation problems with one or more items, the well-known Vickrey–Clarke–Groves (VCG) mechanism (aka Clarke mechanism, Generalized Vickrey Auction) is efficient, strategy-proof, individually rational, and does not incur a deficit. However, it is not (strongly) budget balanced: generally, the agents' payments will sum to more than 0. We study mechanisms that redistribute some of the VCG payments back to the agents, while maintaining the desirable properties of the VCG mechanism. Our objective is to come as close to budget balance as possible in the worst case. For auctions with multiple indistinguishable units in which marginal values are nonincreasing, we derive a mechanism that is optimal in this sense. We also derive an optimal mechanism for the case where we drop the non-deficit requirement. Finally, we show that if marginal values are not required to be nonincreasing, then the original VCG mechanism is worst-case optimal.     

Pareto optimal redistribution and private charity

When private charity exists and is motivated by utility interdependence a non-Pareto optimal outcome, the ‘free-rider’ problem, typically arises. Nevertheless, incremental fiscal redistribution cannot achieve a Paretian welfare improvement so long as private charity continues at positive levels. Donors respond to incremental fiscal redistribution by reducing their voluntary contributions by exactly a dollar for every dollar transferred in this way. No net transfer is achieved unless incremental fiscal redistribution is pursued to the point where private contributions have been driven to zero. Alternatively, a net transfer may be achieved by fiscal measures which affect donors' marginal incentives to donate.     

Optimal Social Insurance with Endogenous Health*

In this paper, I analyze optimal insurance against unemployment and disability in a private information economy with endogenous health and search effort. Individuals can reduce the probability of becoming disabled by exerting prevention effort. I show that the optimal sequence of consumption is increasing for a working individual and constant for a disabled individual. During unemployment, decreasing benefits are not necessarily optimal. The prevention constraint implies increasing benefits while the search constraint demands decreasing benefits while being unemployed. However, if individuals respond sufficiently to search incentives, the latter effect dominates the former and the optimal consumption sequence is decreasing during unemployment.     

On the Provision of Insurance against Search‐Induced Wage Fluctuations*

Should workers be provided with insurance against search‐induced wage fluctuations? To answer this question, I rely on the numerical simulations of a model of on‐the‐job search and precautionary savings. The model is calibrated to low‐skilled workers in the United States. The extent of insurance is determined by the degree of progressivity of a non‐linear transfer schedule. The fundamental trade‐off is that a more generous provision of insurance reduces incentives to search for better‐paying jobs, which increases the cost of providing insurance. I show that progressivity raises the search intensity of unemployed workers, which reduces the equilibrium rate of unemployment, but it lowers the search intensity of employed job seekers, which reduces the output level. I also solve numerically for the optimal non‐linear transfer schedule. The optimal policy is to provide little insurance up to a monthly income level of $1350, so as to preserve incentives to move up the wage ladder, and nearly full insurance above $1450. This policy reduces the standard deviation of labor income net of transfers by 34 per cent and generates a consumption‐equivalent welfare gain of 0.7 per cent. The absence of private savings does not fundamentally change the shape of the optimal transfer function, but tilts the optimal policy towards more insurance, at the expense of a less efficient allocation of workers across jobs.     

Efficient taxation, wage bargaining and policy coordination

This paper is related to the literature on optimal nonlinear taxation under right-to-manage wage formation, and we assume that the fall-back profit facing firms during wage bargaining depends on the profit they can obtain if moving production abroad. The purpose is to study how policy coordination among countries can be used to increase the welfare level in comparison with an uncoordinated equilibrium. We consider coordinated policy reforms with respect to the marginal taxation of labor income, the unemployment benefit and the provision of a public good. The results show that policy coordination that leads to fewer hours of work per employee and/or a reduction of the unemployment benefit will increase welfare compared to the uncoordinated equilibrium.     

Redistributive taxation as social insurance

The modern literature on nonlinear optimal taxation treats differences in income as being due to unobserved differences in ability. A striking result of this assumption is that high income agents should face a zero marginal tax rate. In this paper I assume that differences in observed income are due to exogenous differences in luck. Hence the optimal redistributive tax involves trading off the benefits due to ‘social insurance’ with the costs due to reduced incentives. I derive the optimal forms for linear and nonlinear taxes, and compute some algebraic and numeric examples. Typically high income individuals will face quite high marginal tax rates.