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Unemployment, taxation and public expenditure in OECD economies

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  • Doménech, Rafael
  • Garcí­a, José Ramón

Abstract

This paper considers the financing of productive public goods and social benefits through different types of taxes in a model with unemployment. We incorporate unemployment, caused by the wage-setting behaviour of a monopolistic union, in a neoclassical growth model which integrates a quite detailed structure of taxes used to finance productive public expenditures and social transfers and parameterizes the inefficiency of government to transform taxes into public goods or transfers. The main conclusion is that the relationship between unemployment and labour taxes critically depends on the degree of government efficiency and the unions' perception on how taxes determine the welfare state. If unions internalize that transfers and social benefits are closely related to labour taxes, they do not pressure for higher wages in response to higher taxes. This result offers an alternative explanation to the lack of a positive and robust correlation between unemployment and labour taxes in most OECD countries and periods, whereas the empirical evidence for 21 OECD countries support the effects on unemployment rates of the interaction between taxes and government inefficiency.

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Bibliographic Info

Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 24 (2008)
Issue (Month): 1 (March)
Pages: 202-217

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Handle: RePEc:eee:poleco:v:24:y:2008:i:1:p:202-217

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Web page: http://www.elsevier.com/locate/inca/505544

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References

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Citations

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Cited by:
  1. Xavier Raurich & Valeri Sorolla, 2008. "A General Framework for Growth Models with Non-Competitive Labor and Product Markets and Disequilibrium Unemployment," Working Papers 369, Barcelona Graduate School of Economics.
  2. Jose Emilio Boscá & Rafael Domenech & Javier Ferri, 2008. "Tax Reforms and Labour-market Performance: An Evaluation for Spain using REMS," Working Papers 0804, International Economics Institute, University of Valencia.
  3. Xavier Raurich & Valeri Sorolla, 2011. "Growth, Unemployment and Wage Inertia," UFAE and IAE Working Papers 879.11, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  4. T. Berger & G. Everaert, 2007. "Labour Taxes and Unemployment Evidence from a Panel Unobserved Component Model," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/478, Ghent University, Faculty of Economics and Business Administration.

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