Chapter one determines the properties of the optimal tax function when there is rent-seeking in the labor market. Rent-seeking in the labor market refers to unproductive effort expended in order to increase compensation. With rent-seeking effort expended by high skill workers, low skill workers face reduced wages because firms, in a competitive market, face a zero profits condition. Firms are able to respond to rent-seeking by increasing the number of high skill workers hired, reducing their productivity and wages. The government's optimal tax function increases marginal and average taxes on high skill workers. While low skill workers face lower marginal and average tax rates. The government, therefore, wishes to redistribute income primarily through post-tax income rather than through manipulating the distribution of pre-tax income. Chapter two looks at the effect of both intensive and extensive margin labor supply on the optimal tax function. The model combines a static search labor market model with a classical labor supply model. By combining these two models, the optimal tax function will balance incentives for working more hours and incentives for searching for work. The tax function provides insight into how the government should balance redistribution and efficiency when workers can potentially be unemployed for long periods of time. The resulting tax function increases the marginal tax rate over the model. This increase is due to the government's ability to decrease the wages of workers which increases the general equilibrium probability of employment for workers. Chapter three investigates the effect of uneven internal migration by skill on the income inequality in local labor markets. Migrant moving within the US are more educated than workers who stay in their local labor market. We would expect to see income inequality to decrease in locations that experience more migration. However, we don't see this effect. Chapter one investigates this phenomenon using data from the American Community Survey (ACS). The ACS records information on income, education, and migration patterns and is a yearly representative sample of the US population. To causally estimate the effect of differing rates of migration by skill, a shift-share instrument is constructed. This instrument creates a predicted amount of migration based on historical migration patterns. The instrument seems to work well and does not appear to correlated with labor demand shocks. The main results are that income inequality increases when there are more college educated workers moving than non-college educated workers.
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