Job Search Duration and Marginal Tax Rates: An Empirical Inquiry

Abstract

In recent years the impact of taxation on work hours has generated a great deal of research effort. However, the effects of taxes on other dimensions of labor supply have been largely ignored. The purpose of this paper is to investigate an important ignored issue-the effects of tax rates on the duration of job search by those who are unemployed. This issue is one which seems to us of considerable importance in resolving current debates over whether income tax changes will change unemployment. To the extent that changing tax rates affect the benefits and costs of job search such changes may affect the amount of time workers spend searching for jobs which, in turn, will affect unemployment rates. In order to estimate the effects of marginal tax rates on job search duration, we employ a maximum likelihood approach which allows us to take into account the doubly censored nature of our sample. This procedure remedies some of the econometric difficulties of earlier search duration studies. At the same time, it allows direct tests of the marginal contribution of various determinants to the length of search duration. This latter advantage is particularly important since such direct tests are not available in the currently popular re-employment hazard approach to analyzing search duration. The paper proceeds as follows. Section II provides a brief analysis of the theoretical implications of changing tax rates for job search duration. We conclude that the relationship between job search duration and income tax rates is theoretically ambiguous. The question must be addressed empirically. In section III we present our empirical methodology for addressing the question and compare it to approaches taken in prior search duration analyses. Our data and our empirical results are discussed in section IV. Section V contains our conclusions.