Payroll Taxation, qualifications, wages and unemployment rates in a frictional labor market with productive interactions between segments

The present paper investigates the incidence of payroll taxation in a search and matching framework considering a production function with different type of workers. This allows understanding the productive interactions between segmented labor markets. General results are analytically demonstrated, and two kinds of reforms are numerically simulated: i) shifting the tax burden from low-skilled segments of the labor market to high-skilled segments, capital or consumption; ii) upgrading a share of low-skilled workers in high-skilled segments, which represents an educational policy. The tax reforms' efficiency increases with the substitutability between segments in the production function and with the constraints on the low-skilled wages (high minimum wages). The educational reform's efficiency increases with the complementarities between segments and is not much impacted by the constraints on low-skilled wages. The Malthusian effect of reducing low-skilled labor supply is reinforced by the demand increase due to the increase of high-skilled labor supply and the complementary between segments. The association of employment and productivity increases generates large output and tax revenue increases, which may inter-temporally finance educational reforms.