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

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Author Info
Pekka Sinko
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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Paper provided by Government Institute for Economic Research (VATT) in its series VATT 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

Find related papers by JEL classification:
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
C00 - Mathematical and Quantitative Methods - - General - - - General
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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  1. Jaakko Kiander & Juha Kilponen & Jouko Vilmunen, 2000. "Taxes, Growth and Unemployment in the OECD Countries - Does Collective Bargaininig Matter?," VATT Discussion Papers 235, Government Institute for Economic Research (VATT). [Downloadable!]
  2. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 57(2), pages 279-98, April. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR, CES, MSH, vol. 15(30), pages 47-104, 04. [Downloadable!] (restricted)
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  5. Holmlund, B. & Kolm, A.S., 1995. "Progressive Taxation, Wage Setting, and Unemployment , Theory and Swedish Evidence," Papers 1995-15, Uppsala - Working Paper Series.
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  6. 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. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
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  8. B Lockwood & A Manning, 1993. "Wage Setting and the Tax System: theory and Evidence for the UK," CEP Discussion Papers 0115, Centre for Economic Performance, LSE.
  9. 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. [Downloadable!] (restricted)
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  10. Hersoug, Tor, 1984. "Union Wage Responses to Tax Changes," Oxford Economic Papers, Oxford University Press, vol. 36(1), pages 37-51, March. [Downloadable!] (restricted)
  11. Pekka Sinko & Pasi Holm & Pekka Tossavainen, 1999. "Labour Market Policy and Unemployment - A Job Flow Model of Finland," VATT Discussion Papers 210, Government Institute for Economic Research (VATT). [Downloadable!]
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