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Labour Taxation, Efficiency Wages and the Long Run

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  • Goerke, Laszlo

Abstract

In an efficiency wage economy with variable profits, a shift from payroll to employment taxes will reduce unemployment if the tax level is held constant at the initial wage. However, unemployment will rise if firms are constrained to zero profits in the long run and if tax revenues are constant. This reversal of employment effects occurs because the shift in taxes reduces wages. This implies a budget deficit. Hence, taxes will have to be raised if revenues are held constant. If the firm's profits cannot change, the tax increase will cause some firms to close down and unemployment will rise. Thus, the predicted employment consequences of changes in the tax structure depend on assumptions about the time horizon and budget constraint. Copyright 2000 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

Suggested Citation

  • Goerke, Laszlo, 2000. "Labour Taxation, Efficiency Wages and the Long Run," Bulletin of Economic Research, Wiley Blackwell, vol. 52(4), pages 341-352, October.
    • Handle: RePEc:bla:buecrs:v:52:y:2000:i:4:p:341-52
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    Cited by:

    1. Laszlo Goerke, 2020. "An Efficiency-Wage Model with Habit Concerns about Wages," CESifo Working Paper Series 8428, CESifo.
    2. João Ricardo Faria, 2004. "The Effects Of Taxes On Labour In A Dynamic Efficiency Wage Model," The Japanese Economic Review, Japanese Economic Association, vol. 55(3), pages 286-297, September.
    3. Laszlo Goerke, 2021. "Habit formation and wage determination," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(1), pages 61-76, January.
    4. Tomas Kögel, 2005. "On Substituting Consumption Taxes for Unemployment Insurance Contributions to Reduce Unemployment," Discussion Paper Series 2005_11, Department of Economics, Loughborough University, revised Sep 2005.

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