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Tax decentralization, labour productivity, and employment in OECD countries

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  • David Bartolini
  • Eniel Ninka
  • Raffaella Santolini

Abstract

Tax decentralization should improve the efficiency of local governments and ultimately boost output growth. However, the empirical evidence is mixed. Decomposing output growth into labour productivity and employment growth, we show that the ultimate effect of fiscal decentralization on growth depends on which factor prevails, thus rendering the direct estimation of tax decentralization on growth ambiguous. Using an instrumental variable approach, with instruments based on institutional similarities and geographic distance, the empirical analysis on a sample of 20 OECD countries shows that the positive and significant effect of tax decentralization on the employment growth rate is offset by the reduction of labour productivity growth, resulting in the absence of any statistically significant effect on output growth.

Suggested Citation

  • David Bartolini & Eniel Ninka & Raffaella Santolini, 2019. "Tax decentralization, labour productivity, and employment in OECD countries," Applied Economics, Taylor & Francis Journals, vol. 51(34), pages 3710-3729, July.
    • Handle: RePEc:taf:applec:v:51:y:2019:i:34:p:3710-3729
    DOI: 10.1080/00036846.2019.1584369
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