Discussion paper

DP4115 Good Jobs, Bad Jobs and Redistribution

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.


Lommerud, K and B Sandvik (2003), ‘DP4115 Good Jobs, Bad Jobs and Redistribution‘, CEPR Discussion Paper No. 4115. CEPR Press, Paris & London. https://cepr.org/publications/dp4115