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Redistribution with capital mobility and unions’ wage setting

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  • LEITE-MONTEIRO, Manuel
  • MARCHAND, Maurice
  • PESTIEAU, Pierre

Abstract

Most models of tax competition assume full employment. Yet, actually one often observes that fiscal competition, particularly when it is aimed at attracting investment, is motivated by the concern of fighting unemployment and enhancing job creation. The present paper considers a multicountry model with capital mobility and unemployment. Fiscal policy has two opposing objectives: financing unemployment insurance and increasing employment. In each country there is a majority vote on this policy. The purpose of the paper is to analyse how opening borders to capital flows modifies the median voter's choice of the employment subsidy. Assuming that capital and labour are complements, economic integration is shown to rise the employment subsidy with fixed wages. This agrees with intuition as a larger employment subsidy attracts more capital. However, when wages are set by labour unions economic integration can change the median voter's choice in either direction.

Suggested Citation

  • LEITE-MONTEIRO, Manuel & MARCHAND, Maurice & PESTIEAU, Pierre, 2002. "Redistribution with capital mobility and unions’ wage setting," LIDAM Discussion Papers CORE 2002003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2002003
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    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2002.html
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    Cited by:

    1. Cremer, Helmuth & Pestieau, Pierre, 2002. "Factor Mobility and Redistribution: A Survey," IDEI Working Papers 154, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2003.

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