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Department of Economics, Copenhagen Business School Working Paper Series, Department of Economics, Copenhagen Business School

No 23-2005:
Money or Joy

Annette Alstadsæter, Anne-Sofie Kolm and Birthe Larsen

Abstract: This paper examines the effect of taxes on the individuals' choices of educational direction, and thus on the economy.s skill composition. A proportional labour tax induces too many workers with high innate ability to choose an educational type associated with high consumption value and low effort. This increases the skill mismatch and aggregate unemployment in the economy. The government can correct for this distortion by use of differentiated tuition fees or tax rates.

Keywords: Unemployment; matching; education; optimal taxation; tuition fees; (follow links to similar papers)

JEL-Codes: H21; H24; J64; J68; (follow links to similar papers)

25 pages, November 28, 2005

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