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Tax Progression under Collective Wage Bargaining and Individual Effort Determination

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  • Erkki Koskela
  • Ronnie Schöb

Abstract

We study the impact of tax policy on wage negotiations, workers’ effort, employment, output and welfare when workers’ effort is only imperfectly observable. We show that the different wage-setting motives – rent sharing and effort incentives – reinforce the effects of partial tax policy measures but not necessarily those of more fundamental tax reforms. Although a higher degree of tax progression always leads to wage moderation, the well-established result from the wage bargaining literature that a revenue-neutral increase in the degree of tax progression is good for employment does not carry over to the case with wage negotiations and imperfectly observable effort. While it remains true that introducing tax progression increases employment and output, we cannot rule out negative effects from an increase in tax progression when tax progression is already very high. Welfare effects are ambiguous a priori but we derive sufficient conditions for welfare improving revenue-neutral increases in tax progression.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2024.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2024

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Keywords: wage bargaining; effort determination; tax progression;

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References

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  1. Lindbeck, Assar & Snower, Dennis J., 1991. "Interactions between the efficiency wage and insider-outsider theories," Economics Letters, Elsevier, Elsevier, vol. 37(2), pages 193-196, October.
  2. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, Elsevier, vol. 1(1), pages 79-82.
  3. Koskela, Erkki & Schob, Ronnie, 2002. " Optimal Factor Income Taxation in the Presence of Unemployment," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 4(3), pages 387-404.
  4. Bulkley, George & Myles, Gareth D, 1996. "Trade Unions, Efficiency Wages, and Shirking," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 75-88, January.
  5. Benjamin Bental & Dominique Demougin, 2006. "Institutions, Bargaining Power and Labor Shares," SFB 649 Discussion Papers SFB649DP2006-009, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  6. Christopher Martin, . "Efficiency Wages and Union-Firm Bargaining," Economics and Finance Discussion Papers, Economics and Finance Section, School of Social Sciences, Brunel University 97-10, Economics and Finance Section, School of Social Sciences, Brunel University.
  7. Koskela, E. & Schob, R., 1998. "Does the Composition of Wage and Payroll Taxes Matter Under Nash Bargaining," University of Helsinki, Department of Economics, Department of Economics 443, Department of Economics.
  8. Bulkley, George & Myles, Gareth D., 1997. "Bargaining over effort," European Journal of Political Economy, Elsevier, Elsevier, vol. 13(2), pages 375-384, May.
  9. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 433-44, June.
  10. Koskela, Erkki & Vilmunen, Jouko, 1996. "Tax progression is good for employment in popular models of trade union behaviour," Labour Economics, Elsevier, Elsevier, vol. 3(1), pages 65-80, August.
  11. Diamond, Peter A & Yaari, Menahem, 1972. "Implications of the Theory of Rationing for Consumer Choice Under Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 62(3), pages 333-43, June.
  12. Goerke, Laszlo, 1999. "Efficiency Wages and Taxes," Australian Economic Papers, Wiley Blackwell, Wiley Blackwell, vol. 38(2), pages 131-42, June.
  13. José Ramón García & José Vicente Ríos, 2004. "Effects Of Tax Reforms In A Shirking Model With Union Bargaining," Working Papers. Serie AD, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 2004-42, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  14. Altenburg, Lutz & Straub, Martin, 1998. "Efficiency Wages, Trade Unions, and Employment," Oxford Economic Papers, Oxford University Press, vol. 50(4), pages 726-46, October.
  15. Sanfey, Peter J., 1993. "On the interaction between efficiency wages and union-firm bargaining models," Economics Letters, Elsevier, Elsevier, vol. 41(3), pages 319-324.
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Cited by:
  1. Boeters, Stefan, 2011. "Optimal tax progressivity in unionised labour markets: What are the driving forces?," Economic Modelling, Elsevier, Elsevier, vol. 28(5), pages 2282-2295, September.
  2. Maria Bas & Ivan Ledezma, 2007. "Market Access and the Evolution of within Plant Productivity in Chile," CESifo Working Paper Series 2077, CESifo Group Munich.

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