We characterize optimal redistributive taxation when individuals are heterogeneous in their skills and their values of non-market activities. Search-matching frictions on the labor markets create unemployment. Wages, labor demand and participation are endogenous. Average tax rates are increasing...

The paper shows that for severe enough search frictions, a market for employed workers with wage gains emerges despite the presence of adverse selection. Asymmetric information about a worker's productivity between the worker's current employer and the outside market enables the current employer...