Payroll Taxation and the structure of qualifications and wages in a segmented frictional labor market with intrafirm bargaining

The present paper investigates the incidence of payroll taxation - and more generally labor income taxation - in a search and matching model. The model considers a production function with different type of workers, allowing to understand the interactions between segmented labor markets. Furthermore, the equilibrium is reach through a double process of intra-firm wage bargaining ex post and labor demand ex ante. The model is derived analytically for linear tax function differentiated for worker type, and numerically for non-linear tax functions. The bargaining power parameter is interpreted as reflecting the intra-segment substitutability, in parallel to the inter-segment substitutability deriving from the production function and the segment size and productivity. Some standard results are found, such as the wages,unemployment and incidence increasing with respect to bargaining power; or the payroll tax burden falling mainly on workers. Moreover, it is shown that over-shifting of payroll taxes on net wages may happen. It is also shown that a stronger bargaining power induced weaker direct effect of taxes but larger crossed e ects on other segments. In addition, marginal incidence decreases with respect to the payroll tax level and is therefore significantly lower than mean incidence, which may induce an underestimation of overall incidence by empirical analyses. This also induces a marginally decreasing e ect on loabor costs of payroll tax cuts.