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Labour Taxation, Tax Progression and Job Matching - Comparative Alternative Models of Wage Setting

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  • Pekka Sinko
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    Abstract

    In this paper we consider the effects of labour taxation on wages, unemployment and efficiency in a job matching framework. We derive labour market equilibrium with taxes in a model of endogenous job creation and job destruction under three alternative hypothesis of wage formation: Nash bargain, monopoly union and efficiency wages. We find that labour taxes harm employment irrespective of the wage formation mechanism. However, employment turns out to be much less sensitive to taxation in the models involving wage bargaining. Our results also suggest that increased progression in labour taxation may improve employment with low or even non-existent efficiency cost if wages are set in a bargaining framework.

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    Bibliographic Info

    Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 285.

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    Date of creation: 21 Nov 2002
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    Handle: RePEc:fer:dpaper:285

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    Related research

    Keywords: Labour taxation; wage setting; job matching;

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    References

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    1. Jaakko Kiander & Juha Kilponen & Jouko Vilmunen, 2000. "Taxes, Growth and Unemployment in the OECD Countries - Does Collective Bargaininig Matter?," Discussion Papers 235, Government Institute for Economic Research Finland (VATT).
    2. Koskela, Erkki & Vilmunen, Jouko, 1996. "Tax progression is good for employment in popular models of trade union behaviour," Labour Economics, Elsevier, vol. 3(1), pages 65-80, August.
    3. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
    4. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January.
    5. Holmlund, B. & Kolm, A.S., 1995. "Progressive Taxation, Wage Setting and Unemployment - Theory and Swedish Evidence," Papers 15, Uppsala - Working Paper Series.
    6. Rocheteau, Guillaume, 2001. "Equilibrium unemployment and wage formation with matching frictions and worker moral hazard," Labour Economics, Elsevier, vol. 8(1), pages 75-102, January.
    7. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR & CES & MSH, vol. 15(30), pages 47-104, 04.
    8. Hersoug, Tor, 1984. "Union Wage Responses to Tax Changes," Oxford Economic Papers, Oxford University Press, vol. 36(1), pages 37-51, March.
    9. Booth,Alison L., 1994. "The Economics of the Trade Union," Cambridge Books, Cambridge University Press, number 9780521464673, October.
    10. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
    11. Pisauro, Giuseppe, 1991. "The effect of taxes on labour in efficiency wage models," Journal of Public Economics, Elsevier, vol. 46(3), pages 329-345, December.
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