Optimal Tax Credits in the Context of the German System of Apprenticeship Training and Social Security
Series
VWA Discussion Papers
Type
discussion paper
Date Issued
2006-09-01
Author(s)
Fleischhauer, Kai-Joseph
Abstract
There is an ongoing discussion in Germany about the implementation of tax credits in order to reintegrate low-skilled workers into the labor market. Chapter 3 of my PhD thesis aims at analyzing the policy instrument of tax credits in a theoretical model that systematically compares the costs and benefits in the context of the German system of apprenticeship training and social security. Building on recent training literature, a two-period partial-equilibrium model is developed that allows for worker heterogeneity in ability.
In our model, the implementation of tax credits in terms of a negative income tax faces a trade-off with respect to overall welfare. While tax credits reduce the number of unemployed workers at the extensive margin, they increase at the same time the opportunity costs of apprenticeship training, which implies that human capital formation is decreased. Furthermore, the model suggests that it may not be optimal to reintegrate those workers at the bottom of the ability distribution into the labor market.
In our model, the implementation of tax credits in terms of a negative income tax faces a trade-off with respect to overall welfare. While tax credits reduce the number of unemployed workers at the extensive margin, they increase at the same time the opportunity costs of apprenticeship training, which implies that human capital formation is decreased. Furthermore, the model suggests that it may not be optimal to reintegrate those workers at the bottom of the ability distribution into the labor market.
Language
English
Keywords
Unemployment of Low-Skilled Workers
Tax Credits
Labor Supply
Human Capital Formation
HSG Classification
contribution to scientific community
Refereed
No
Publisher
University of St. Gallen, Department of Economics
Publisher place
St. Gallen
Number
2006-21
Start page
1
End page
36
Pages
36
Subject(s)
Division(s)
Eprints ID
39453