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Optimal Taxation to Correct Job Mismatching

Author

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  • Guillaume Wilemme

    (University of Leicester)

Abstract
This paper characterises efficiency-enhancing taxes when job search activities generate excessive mismatching between firms and workers. Workers can direct and modulate their search efforts towards particular firms before matching and bargaining over wages. A composition externality arises because workers do not internalise the consequences of mismatching on the entry decision of firms, resulting in lower average sectoral productivity and suboptimal job creation. The optimal policy taxes low-surplus matches and subsidises high-surplus matches. The model is calibrated on occupational mismatching in the United States. In addition to the pre-existing flat tax, the corrective taxes subsidise each $1 increase in productivity by $0.45 to $0.87 on average. (Copyright: Elsevier)

Suggested Citation

  • Guillaume Wilemme, 2021. "Optimal Taxation to Correct Job Mismatching," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 170-197, April.
    • Handle: RePEc:red:issued:18-309
    DOI: 10.1016/j.red.2020.09.011
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    Cited by:

    1. Bagger, Jesper & Moen, Espen R. & Vejlin, Rune Majlund, 2021. "Equilibrium Worker-Firm Allocations and the Deadweight Losses of Taxation," IZA Discussion Papers 14865, Institute of Labor Economics (IZA).
    2. Peltonen, Juho, 2023. "On the efficiency of labor markets with short-time work policies," MPRA Paper 119165, University Library of Munich, Germany.
    3. Breda, Thomas & Haywood, Luke & Wang, Haomin, 2022. "Equilibrium Effects of Payroll Tax Reductions and Optimal Policy Design," IZA Discussion Papers 15810, Institute of Labor Economics (IZA).
    4. Estache, Antonio & Foucart, Renaud, 2021. "On the political economy of industrial, labor and social reforms as complements," European Economic Review, Elsevier, vol. 137(C).
    5. Jesper Bagger & Espen Moen & Rune Vejlin, 2018. "Optimal Taxation with On-the-Job Search," 2018 Meeting Papers 805, Society for Economic Dynamics.

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    More about this item

    Keywords

    Anti-redistributive taxation; Composition externality; Job quality; Mismatch; Search strategy;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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