DP4115 | Good Jobs, Bad Jobs and Redistribution

Publication Date

23/11/2003

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Abstract

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.