This paper studies the econometric relationship between labor productivity and tax wedge by using two-stage least square (TSLS) fixed effect model on two panel data of OECD countries to address endogeneity problem. I use two response variables, i.e., the growth rate of GDP per hour worked and the log of value added per hour worked for total manufacturing industry in 1997 dollar from two data sources, to verify whether the estimates of the effect of tax wedge are consistent each other. I do find that they are consistent and one percentage increase in tax wedge can lead to about 0.09 percentage decrease in labor productivity growth rate.
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Find related papers by JEL classification: C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems