Scandinavian Working Papers in Economics

Discussion Papers,
Statistics Norway, Research Department

No 419: Tax Effects on Unemployment and the Choice of Educational Type

Annette Alstadsæter, Ann-Sofie Kolm and Birthe Larsen ()
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Birthe Larsen: Statistics Norway

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 income tax induces too many workers with high innate ability to choose an educational type with high consumption value and low effort costs. 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

JEL-codes: J64; J68; H21; H24 January 2005

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