Essays in Public Policy and Labour Economics

This thesis comprises three chapters that provide discussions for labour income taxation and labour market effects of immigration and minimum wage. Chapter 1 studies the optimal income taxation with a finite number of types. It is shown that Rawlsian social welfare and maximax social welfare functions constitute upper and lower bounds for the second-best optimal marginal tax schedules. Therefore, any marginal tax schedule with a higher tax rate than Rawlsian bound or with a lower tax rate than maximax bound would be inefficient. Moreover, it is shown that reasonable marginal tax schedules between these two benchmarks could be supported as a second-best tax schedule with appropriate social weights. These results are also valid when bunching is optimal. Additionally, some characterization for the total tax rates at the top and bottom of the income distribution are given. Chapter 2 analyses the labour market effects of the Syrian refugees on Turkish natives. Our results suggest that there are no negative effects on native employment but there is a compositional change in the labour market. On the contrary, we provide evidence for positive effects on formal employment which is confirmed by the administrative data. When we analyse the changes in labour outcomes by gender, results are differentiated in a systematic way. For males, while there is an increase in formal employment, informal employment decreases. Results are the opposite for females. There is a reduction in formal employment but an increase in informal female employment. These results suggest that while refugees are substitutes for females in the formal market, they are complements to formal male workers. Chapter 3 investigates wage and employment effects of the minimum wage in Turkey. Our analysis suggests that while formal wages are increasing with the minimum wage, there is no significant change in informal market wages. For the employment outcomes, we observe a significant increase in informal employment however there is no significant change in formal employment. The increased share of informal labour is mainly due to increased labour force participation. Since females are paid less than males, the wage and employment effects are much stronger for women. Although minimum wage is set for a calendar month, we observe no changes in formal and informal working hours

Optimal income taxation under labor interdependence

In this thesis, I consider optimal redistributive income taxation under a Mirrleesian framework while adding utility interdependence over labor choice and analyze whether the optimal tax schedule is regressive or progressive. In this environment, I show that optimal marginal income taxation could be progressive depending on the parameters of the model. There are two separate forces that are at work in determining the optimal tax schedule. First, due to the informational problems, there is a usual Mirrleesian force that works towards the regressivity of taxes. Second effect is a novel force that arises from labor externality and has a progressive effect on the income tax. This effect could be called as Pigouvian tax. Labor externality requires subsidies for agents which are asymmetric according to productivities. Because of this asymmetry, there should be higher subsidies for low types which has a progressive effect on the optimal tax schedule. Pigouvian and Mirrleesian effects are in a multiplicative form in the tax function, therefore the tax schedule is identified by the effect which is more powerful. I also show that, when we consider the labor interdependence, zero tax at the top of the skill distribution result is no longer valid. Additionally, I show that even under full information the market is not efficient and there is a need for progressive income taxes, as there is a need to correct the labor externality. Moreover, the numerical examples of the paper show the progressive effect of labor externality on the tax schedule. This additional concern about labor externality makes the income taxation schedule more consistent with the current tax policies