Monopsony Amplifies Distortions from Progressive Taxes / David W. Berger, Kyle F. Herkenhoff, Simon Mongey, Negin Mousavi.

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Berger, David W

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w31972.Publication details: Cambridge, Mass. National Bureau of Economic Research 2023.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: In this short paper we show that progressive income taxes distort hiring and wages when firms have labor market power. From a firm's perspective, raising pre-tax wages increases employment by less when taxes are progressive as less of the pre-tax wage is paid to workers. Understanding this when setting wages leads to lower wages and employment at all firms. When firms differ in productivity, progressive taxes also distort the allocation of labor across firms. We characterize this novel monopsony cost of progressivity in a simple monopsony economy and derive efficiency wedges that depend on progressivity. A simple quantification of these wedges points to the possibility that the monopsony cost may be of similar magnitudes to redistribution and insurance benefits.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w31972 (Browse shelf(Opens below))	Not For Loan

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December 2023.

In this short paper we show that progressive income taxes distort hiring and wages when firms have labor market power. From a firm's perspective, raising pre-tax wages increases employment by less when taxes are progressive as less of the pre-tax wage is paid to workers. Understanding this when setting wages leads to lower wages and employment at all firms. When firms differ in productivity, progressive taxes also distort the allocation of labor across firms. We characterize this novel monopsony cost of progressivity in a simple monopsony economy and derive efficiency wedges that depend on progressivity. A simple quantification of these wedges points to the possibility that the monopsony cost may be of similar magnitudes to redistribution and insurance benefits.