DP3446 The Optimal Taxation of Unskilled Labour with Job Search and Social Assistance

Author(s): Jan Boone, A Lans Bovenberg
Publication Date: July 2002
Keyword(s): bunching, labour market search, low-skilled labour, non-linear taxation, participation margin, social assistance, unemployment
JEL(s): H21, J64, J65
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3446

In order to explore the optimal taxation of low-skilled labour, we extend the standard model of optimal non-linear income taxation in the presence of quasi-linear preferences in leisure by allowing for in-voluntary unemployment, job search, an exogenous welfare benefit, and a non-utilitarian social welfare function. In trading of more low-skilled employment against more work effort of higher skilled workers, the government balances distortions on the search margin with those on work effort. Positive marginal tax rates at the bottom may help to encourage job search if this search is taxed on a net basis. Lower welfare benefits and search costs tend to reduce marginal tax rates throughout the skill distribution.