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Labour Taxes, Market Size and Productivity Growth

Author

Listed:
  • Domenico Ferraro
  • Soroush Ghazi
  • Pietro F Peretto

Abstract

How do changes in labour taxes affect innovation and aggregate productivity growth? To answer this question, we propose a quantitative, general equilibrium growth model featuring product and quality innovation with endogenous market structure, estimate its parameters and provide empirical validation for the propagation mechanism of labour tax changes. We find that a temporary cut in flat-rate labour taxes produces a growth acceleration in aggregate productivity, permanently increasing the path of real GDP per capita. Moreover, such permanent gains are sizeable even without long-run growth effects.

Suggested Citation

  • Domenico Ferraro & Soroush Ghazi & Pietro F Peretto, 2023. "Labour Taxes, Market Size and Productivity Growth," The Economic Journal, Royal Economic Society, vol. 133(654), pages 2210-2250.
    • Handle: RePEc:oup:econjl:v:133:y:2023:i:654:p:2210-2250.
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    References listed on IDEAS

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