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Interregional Demand for Workers and the Effects of Labor Income Taxation

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  • Batabyal, Amitrajeet
  • Beladi, Hamid

Abstract

We study the short-run impacts of labor income taxation in an aggregate economy of N>2 regions. The distinct regions demand workers. Each region is endowed with one unit of immobile capital. The aggregate economy also has one unit of labor that is mobile across the regions. All regions produce a final good with identical Cobb-Douglas production functions. The price of output is normalized to unity. We perform five tasks. First, we focus on the benchmark case in which no region taxes either capital or labor. We find the equilibrium wage, the allocation of workers across the regions, and the total income of labor and capital. Second, we study the impact of a tax τ on labor income in region 1 when the other N-1 regions do not tax labor income. We ascertain the after-tax return to labor in region 1, the equilibrium wage, and the allocation of labor across the regions. Third, we compute the total income of capital and labor and the tax revenue in region 1. Fourth, we discuss whether workers in region 1 are better off with a tax on labor income. Finally, we comment on the policy implications of our research.

Suggested Citation

  • Batabyal, Amitrajeet & Beladi, Hamid, 2020. "Interregional Demand for Workers and the Effects of Labor Income Taxation," MPRA Paper 102525, University Library of Munich, Germany, revised 17 Jul 2020.
    • Handle: RePEc:pra:mprapa:102525
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    References listed on IDEAS

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    1. Amit Batabyal & Peter Nijkamp, 2014. "Technology, Learning, and Long Run Economic Growth in Leading and Lagging Regions," ERSA conference papers ersa14p893, European Regional Science Association.
    2. Yvon Rocaboy & Aki Kangasharju & Antti Moisio & Emmanuelle Reulier, 2006. "Tax competition among municipalities in Finland," Post-Print halshs-00090287, HAL.
    3. Amitrajeet A. BATABYAL, 2018. "Note On Local Public Good Induced Spillovers Between A Leading And A Lagging Region," Regional Science Inquiry, Hellenic Association of Regional Scientists, vol. 0(2), pages 11-16, July.
    4. Bucovetsky, S., 1995. "Rent seeking and tax competition," Journal of Public Economics, Elsevier, vol. 58(3), pages 337-363, November.
    5. Batabyal, Amitrajeet & Nijkamp, Peter, 2014. "Some properties of the technology gap between leading and lagging regions," MPRA Paper 71596, University Library of Munich, Germany.
    6. Amitrajeet A. Batabyal & Peter Nijkamp, 2020. "Workplace choice, commuting costs, and wage taxation in urban and adjacent rural regions," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 65(3), pages 775-786, December.
    7. Cheryl Gray & Tracey Lane & Aristomene Varoudakis, 2007. "Fiscal Policy and Economic Growth : Lessons for Eastern Europe and Central Asia," World Bank Publications - Books, The World Bank Group, number 6883.
    8. Daisaku Yamamoto, 2008. "Scales of regional income disparities in the USA, 1955-2003," Journal of Economic Geography, Oxford University Press, vol. 8(1), pages 79-103, January.
    9. Edmark, Karin & Ågren, Hanna, 2008. "Identifying strategic interactions in Swedish local income tax policies," Journal of Urban Economics, Elsevier, vol. 63(3), pages 849-857, May.
    10. Dembour, Carole & Wauthy, Xavier, 2009. "Investment in public infrastructure with spillovers and tax competition between contiguous regions," Regional Science and Urban Economics, Elsevier, vol. 39(6), pages 679-687, November.
    11. Batabyal, Amitrajeet A. & Beladi, Hamid, 2015. "Knowledge goods, ordinary goods, and the effects of trade between leading and lagging regions," Research Policy, Elsevier, vol. 44(8), pages 1537-1542.
    12. Junhong Bai & Jiayu Lu & Sijia Li, 2019. "Fiscal Pressure, Tax Competition and Environmental Pollution," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(2), pages 431-447, June.
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    Cited by:

    1. Batabyal, Amitrajeet & Beladi, Hamid, 2022. "Sustained Economic Growth and Physical Capital Taxation in a Creative Region," MPRA Paper 113899, University Library of Munich, Germany, revised 17 Jul 2022.
    2. Amitrajeet A. Batabyal & Seung Jick Yoo, 2023. "Using Taxes to Attract the Creative Class in the Presence of a Region-Specific Rent," The Review of Regional Studies, Southern Regional Science Association, vol. 53(2), pages 182-191.

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    More about this item

    Keywords

    Capital; Labor; Interregional Demand; Labor Income Taxation; Factor Mobility;
    All these keywords.

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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