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Labour Taxation and the Degree of Centralisation in a Trade Union Model with Endogenous Labour Supply

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  • Pekka Sinko
  • Juha Kilponen

Abstract

This paper considers the effect of labour taxation on wages and employment in a trade union model with endogenous working hours. In the model, individuals choose working hours with a given wage rate, competitive firms decide on employment taking wages and working hours as given and a monopoly union sets wages allowing for the response of both workers and firms. Heads and hours are assumed to be perfect substitutes in production. The government collects taxes on wages and uses the revenue to finance unemployment benefits and public good. Having derived the results of the conventional decentralised union model we show that when the centralised union perceives the link between taxes paid and public good provided, it will lead to wage moderation and higher employment. Also, wages and employment are shown to be less sensitive to increases in the wage taxation in the centralised union case. In the extreme, if individual worker's marginal utility from public good is sufficiently high, a tax increase can even improve employment. This somewhat surprising result arises because labour supply effect dominates the wage effect on labour demand.

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Bibliographic Info

Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 250.

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Date of creation: 30 Mar 2001
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Handle: RePEc:fer:dpaper:250

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Keywords: Union models; Labour taxation; Degree of centralisation; Working hours;

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References

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  1. Driffill, John & van der Ploeg, Frederick, 1993. "Monopoly Unions and the Liberalisation of International Trade," Economic Journal, Royal Economic Society, vol. 103(417), pages 379-85, March.
  2. Koskela, Erkki & Schob, Ronnie, 1999. "Alleviating unemployment:: The case for green tax reforms," European Economic Review, Elsevier, vol. 43(9), pages 1723-1746, October.
  3. Daveri, Francesco & Tabellini, Guido, 1997. "Unemployment, Growth and Taxation in Industrial Countries," CEPR Discussion Papers 1681, C.E.P.R. Discussion Papers.
  4. Jaakko Kiander & Pasi Holm & Erkki Koskela, 1995. "Unions, Labour supply and Structure of Taxation: Equal Tax Bases," Discussion Papers 110, Government Institute for Economic Research Finland (VATT).
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Cited by:
  1. Pekka Sinko, 2003. "Subsidizing vs. Experience Rating of Unemployment Insurance in Unionized Labor Markets," Discussion Papers 319, Government Institute for Economic Research Finland (VATT).
  2. Alfonso Arpaia & Giuseppe Carone, 2004. "Do labour taxes (and their composition) affect wages in the short and in the long run?," Public Economics 0411004, EconWPA.
  3. Alfonso Arpaia & Giuseppe Carone, 2004. "Do labour taxes (and their composition) affect wages in the short and the long run? - Alfonso Arpaia and Giuseppe Carone," European Economy - Economic Papers 216, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  4. Pekka Sinko, 2004. "Progressive Taxation Under Centralised Wage Setting," Discussion Papers 349, Government Institute for Economic Research Finland (VATT).
  5. Kiander, Jaakko & Kilponen, Juha & Vilmunen, Jouko, 2004. "Labor taxation, public finance, and wage determination: evidence from OECD countries," European Journal of Political Economy, Elsevier, vol. 20(4), pages 983-999, November.
  6. Pekka Sinko & Juha Kilponen, 2003. "Does Centralised Wage Setting Lead into Higher Taxation?," Discussion Papers 314, Government Institute for Economic Research Finland (VATT).
  7. Pekka Sinko, 2005. "Does Centralised Wage Setting Lead into Higher Taxation?," Labor and Demography 0509007, EconWPA.

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