Optimal Employment Subsidy to Heterogeneous Workers under Asymmetric Information

It is wellknown that unemployment benefits and minimum income guarantees generate an unemployment trap. The unemployment is indeed not enticed to work because he is imposed at a 100% marginal tax rate. In this paper, we design the optimal employment without risking its budget deficit. The subsidy is applied on top of an initial tax-benefit system that can not be reformed. We show how this subsidy translates the point of 100% marginal tax to workers with lower abilities. Simulations show that full employment can be achieved in many cases. We relate then the properties of such subsidy to those of optimal non-linear taxation models.