Rune Vejlin, Aarhus University – University of Copenhagen

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Rune Vejlin, Aarhus University

Income Taxation and the Equilibrium Allocation of Labor


Abstract:

We study the impact of labor income taxation on workers' job search behavior and the implications it has for the equilibrium allocation of heterogenous workers across heterogenous firms. The analysis is conducted within a complete markets equilibrium on-the-job search model with two-sided heterogeneity, endogenous job search effort and hiring intensity, equilibrium wage formation, and firm entry and exit. In a nutshell, by appropriating part of the gain from finding a better paid job, income taxation reduces the return to job search effort, and distorts workers' job search effort, which, in turn, distorts the equilibrium allocation of labor. The model is estimated on Danish matched employer-employee data, and is used to evaluate a series of tax reforms in Denmark in the 1990s and 2000s, to provide new insights into the elasticity of taxable labor income, and to identify a Pareto optimal income tax reform.

 Rune Vejlin is Associate Professor at the Department of Economics and Business, Aarhus University and a Research Fellow at IZA

His primary research interests are Labor Economics in general, Applied Microeconometrics, and Labor Market Models in particular.