Journal Article

Optimal Fiscal Policy with Labor Selection


  • Chugh
  • S.K.
  • Lechthaler
  • W.
  • Merkl
  • C.
Publication Date

This paper characterizes long-run and short-run optimal fiscal policy in the labor selection framework. In a calibrated non-Ramsey decentralized equilibrium, labor market volatility is inefficient. Keeping fixed the structural parameters, the Ramsey government achieves efficient labor market volatility; doing so requires labor-income tax volatility that is orders of magnitude larger than the tax-smoothing results based on Walrasian labor markets, but a few times smaller than the results based on search and matching markets. We analytically characterize selection-modelconsistent wedges and inefficiencies in order to understand optimal tax volatility.


JEL Classification
E24, E32, E50, E62, E63, J20

Key Words

  • Efficiency
  • hiring costs
  • labor market frictions
  • labor wedge
  • optimal taxation
  • zero intertemporal distortions