Optimal Redistributive Taxation and Provision ofPublic Input Goods in an Economy withOutsourcing and Unemployment

This paper concerns optimal redistributive income taxation and provision of a public inputgood in a two-type model with a minimum wage policy implemented for the low-ability type,where firms may outsource part of the production process abroad, and where outsourcing issubstitutable for domestic low-ability labor. Our results show that the incentives for thegovernment to relax the self-selection constraint and to increase the employment among thelow-skilled reinforce each other in terms of marginal income taxation; both of them contributeto increase the marginal income tax rate implemented for the low-ability type and decreasethe marginal income tax rate implemented for the high-ability type. The appearance ofequilibrium unemployment also constitutes an incentive to implement a tax on outsourcing.Without a direct instrument for taxing outsourcing, the government may reduce the amount ofresources spent on outsourcing by increased provision of the public input good, which leadsto less wage inequality and increased employment....