Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2005:4: Tax Effects of Unemployment and the Choice of Educational Type

Annette Alstadsæter (), Ann-Sofie Kolm () and Birthe Larsen ()
Additional contact information
Annette Alstadsæter: Research Department, Statistics Norway,, Postal: P.b. 8131 Dep, N-0033 Oslo, Norway
Ann-Sofie Kolm: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Birthe Larsen: CIM and Copenhagen Business School, Postal: Copenhagen Business School, Department of Economics, Solbjerg Plads 3, DK-2000 Copenhagen F., Denmark

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: H21; H24; J64; J68

25 pages, April 20, 2005

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