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Impacts of Labor Taxation with Perfectly and Imperfectly Competitive Domestic Labor Markets under Flexible Outsourcing

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  • Erkki Koskela
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    Abstract

    What are the impacts of labor tax reform on wage setting and employment to keep the relative tax burden per low-skilled and high-skilled workers constant in the case of heterogenous domestic labor markets, i.e. imperfect competition in low-skilled labor and perfect competition in high-skilled labor in the presence of outsourcing? A higher degree of tax progression by raising the wage tax and the tax exemption for the low-skilled workers will decrease the wage rate and increase labour demand of low-skilled workers, whereas it will decrease (increase) employment of high-skilled workers in CES utility function when the elasticity of substitution between consumption and leisure is higher (lower) than one. A higher degree of wage tax progression for the high-skilled worker will have no effect on the high-skilled wage in the presence of CES and C-D utility function so this will have no total employment effects.

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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2852.

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    Date of creation: 2009
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    Handle: RePEc:ces:ceswps:_2852

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    Keywords: flexible outsourcing; dual labor market; impacts of labour taxation;

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    1. Stefanova Boyka M, 2006. "The Political Economy of Outsourcing in the European Union and the East-European Enlargement," Business and Politics, De Gruyter, De Gruyter, vol. 8(2), pages 1-45, August.
    2. Koskela, Erkki & Schöb, Ronnie, 2001. "Optimal Factor Income Taxation in the Presence of Unemployment," Discussion Papers, The Research Institute of the Finnish Economy 758, The Research Institute of the Finnish Economy.
    3. Rebecca Riley & Garry Young, 2007. "Skill heterogeneity and equilibrium unemployment," Oxford Economic Papers, Oxford University Press, vol. 59(4), pages 702-725, October.
    4. Jakob Roland Munch & Jan Rose Skaksen, 2005. "Specialization, Outsourcing and Wages," Discussion Papers 05-28, University of Copenhagen. Department of Economics.
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    6. Hans-Werner Sinn, 2007. "The Welfare State and the Forces of Globalization," CESifo Working Paper Series 1925, CESifo Group Munich.
    7. Gorg, Holger & Hanley, Aoife, 2005. "Labour demand effects of international outsourcing: Evidence from plant-level data," International Review of Economics & Finance, Elsevier, Elsevier, vol. 14(3), pages 365-376.
    8. Geishecker, Ingo & Görg, Holger, 2007. "Winners and losers: A Micro-level Analysis of International Outsourcing and Wages," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6484, C.E.P.R. Discussion Papers.
    9. Hartmut Egger & Peter Egger, 2006. "International Outsourcing and the Productivity of Low-Skilled Labor in the EU," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 44(1), pages 98-108, January.
    10. Choi, E. Kwan & Harrigan, James, 2003. "Handbook of International Trade," Staff General Research Papers, Iowa State University, Department of Economics 11375, Iowa State University, Department of Economics.
    11. Sebastian Braun & Juliane Scheffel, 2007. "Does International Outsourcing Depress Union Wages?," SFB 649 Discussion Papers SFB649DP2007-033, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    12. Eckel, Carsten & Egger, Hartmut, 2009. "Wage bargaining and multinational firms," Munich Reprints in Economics, University of Munich, Department of Economics 20528, University of Munich, Department of Economics.
    13. Robert C. Feenstra & Gordon H. Hanson, 1999. "The Impact Of Outsourcing And High-Technology Capital On Wages: Estimates For The United States, 1979-1990," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(3), pages 907-940, August.
    14. Jan Rose Skaksen, 2004. "International outsourcing when labour markets are unionized," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 37(1), pages 78-94, February.
    15. Aronsson, Thomas & Sjogren, Tomas, 2004. "Efficient taxation, wage bargaining and policy coordination," Journal of Public Economics, Elsevier, Elsevier, vol. 88(12), pages 2711-2725, December.
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