DP4115 Good Jobs, Bad Jobs and Redistribution

Author(s): Kjell Erik Lommerud, B. Sandvik, Odd Rune Straume
Publication Date: November 2003
Keyword(s): optimal taxation, redistribution, rent sharing, segmented labour markets
JEL(s): H20, J42, J51
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4115

We analyse the question of optimal taxation in a dual economy, when the policy-maker is concerned about the distribution of labour income. Income inequality is caused by the presence of sunk capital investments, which creates a ?good jobs? sector due to the capture of quasi-rents by trade unions. With strong unions and high planner preference for income equality the optimal policy is a combination of investment subsidies and progressive income taxation. If unions are weaker, the policy-maker may instead choose to tax investment.