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Prof. Rune Vejlin

Aarhus University, Denmark

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Meeting number: 2741 456 6893
Meeting password: 532697

Authors: Rune Vejlin, Jesper Bagger and Espen Rasmus Moen

Abstract: We analyse the deadweight losses of tax-induced labor misallocation in competitive search equilibrium. Workers search to climb a job ladder and firms post vacancies. Workers differ in abilities. Jobs differ in productivities and amenities. We allow for affine taxes on labour income.  A higher tax rate distorts search effort, job ranking, and vacancy creation.  We calibrate the model using matched employer-employee data from Denmark. The elasticity of taxable income is $0.13$ and arises primarily from distorted search effort and vacancy creation. Steeply rising deadweight losses from distorted vacancy creation imply that the deadweight loss in the calibrated economy exceeds those incurred even by a very inequality-averse social planner.