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Does Centralised Wage Setting Lead into Higher Taxation?

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Author Info
Pekka Sinko
Juha Kilponen

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Abstract

This paper studies implications of centralised wage setting for the level of taxation and public expenditure in an analytical model with unionised labour markets. We extend the previous studies by allowing for both demand and supply effects of labour. Also, in addition to the standard social planner approach, we consider a political economy set up, where the tax rate is chosen to maximise the welfare of a median voter. Our results suggest that when working hours are endogenous, the relationship between the degree of centralisation and the labour tax rate is ambiguous. In particular, if the marginal utility from public provision is sufficiently low, centralised wage setting implies lower optimal tax rate on labour. This is due to a "budgetary discipline effect", which reduces the optimal tax rate preferred by the median voter under centralised wage setting.

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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 314.

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Date of creation: 22 Oct 2003
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Handle: RePEc:fer:dpaper:314

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Related research
Keywords: Taxation; wage setting; public expenditure.;

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Risto Vaittinen, 2003. "Liberalisation of Agricultural Trade - Global Implications and what it Means for the EU," Discussion Papers 303, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  2. Kari Hämäläinen, 2003. "Education and Unemployment: State Dependence in Unemployment Among Young People in the 1990s," Discussion Papers 312, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  3. Kari, Seppo & Ylae-Liedenpoha, Jouko, 2002. "Classical Corporation Tax as a Global Means of Tax Harmonization," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  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. Takis Venetoklis & Aki Kangasharju, 2003. "Do Wage-subsidies Increase Employment in Firms?," Discussion Papers 304, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  6. Daniele Checchi & Claudio Lucifora, 2002. "Unions and labour market institutions in Europe," Economic Policy, CEPR, CES, MSH, vol. 17(35), pages 361-408, October. [Downloadable!] (restricted)
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  7. Heikki Räisänen, 2003. "How to Cope with Labour Market Policy Tools in Economic Downturn: Finnish Evidence," Discussion Papers 305, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  8. Sari Pekkala, 2003. "Is Little Brother Nothing but Trouble?: Educational Attainment, Returns to Schooling and Sibling Structure," Discussion Papers 302, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  9. 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. [Downloadable!] (restricted)
  10. Pekka Sinko & Juha Kilponen, 2001. "Labour Taxation and the Degree of Centralisation in a Trade Union Model with Endogenous Labour Supply," Discussion Papers 250, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  11. Koskela, Erkki & Schob, Ronnie, 1999. "Alleviating unemployment:: The case for green tax reforms," European Economic Review, Elsevier, vol. 43(9), pages 1723-1746, October. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
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