This paper examines the effect of taxes on individuals' educational choices, and thus on the economy's skill composition. A proportional labour tax induces too many workers with high innate ability to choose education that is associated with high consumption and relatively low effort. This...

This paper studies optimal labour market policy in a society where differently gifted individuals can invest in training to further increase their labour market productivity and where the government seeks both efficiency and equity. Frictions in the matching process create unemployment and...