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The effect of labour taxes on labour demand: a comparison between Belgium and neighbouring countries

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Author Info

  • Laenen, Wout
  • Moons, Cindy

    ()
    (Hogeschool-Universiteit Brussel (HUB), Belgium)

  • Persyn, Damiaan

    ()
    (LICOS and VIVES, KULeuven, Faculty of Business and Economics, Leuven, Belgium)

Abstract

This study examines the evolution of labour costs and taxes in Belgium and neighbouring countries. We try to clarify the common issues in the current debate concerning labour costs and labour demand in Belgium and neighbouring countries and investigate the influence of labour costs on employment by using macroeconomic OECD data. We conclude that the tax wedge in Belgium is one of the highest of all OECD countries. Labour costs in Belgium rose at a moderate tempo, but labour productivity evolved less favourably compared with neighbouring countries. Belgian unit labour costs, considered as an indicator of competitiveness, evolved unfavourably. By using a dynamic error correction model we find a statistically significant but limited negative relation between labour costs and employment. A decrease in labour costs of 10% results in an increase of employment of only 1.3%, which indicates a strongly inelastic labour demand. In contrast to studies based on microeconomic data, which find generally higher wage elasticities, on the basis of this study no decisive elements can be found to question the rationale of the current wage indexation mechanism.

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Bibliographic Info

Paper provided by Hogeschool-Universiteit Brussel, Faculteit Economie en Management in its series Working Papers with number 2011/25.

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Length: 27 page
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:hub:wpecon:201125

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Web page: http://research.hubrussel.be
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Related research

Keywords: economic history; ECSC; European Integration; regional concentration;

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  1. Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, vol. 55(5), pages 1035-56, September.
  2. Daniel S. Hamermesh & Gerard Pfann, 1992. "Turnover and the Dynamics of Labor Demand," NBER Working Papers 4204, National Bureau of Economic Research, Inc.
  3. Sneessens, H. & Dreze, J., 1985. "A discussion of Belgian unemployment, combining traditional concepts and disequilibrium econometrics," CORE Discussion Papers 1985040, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. L'Horty, Yannick & Rault, Christophe, 2003. "The Impact of Growth, Labour Cost and Working Time on Employment: Lessons from the French Experience," IZA Discussion Papers 871, Institute for the Study of Labor (IZA).
  5. Naastepad, C. W. M. & Kleinknecht, Alfred, 2004. "The Dutch productivity slowdown: the culprit at last?," Structural Change and Economic Dynamics, Elsevier, vol. 15(2), pages 137-163, June.
  6. European Commission, 2009. "Taxation trends in the European Union: 2009 edition," Taxation trends 2009, Directorate General Taxation and Customs Union, European Commission.
  7. European Commission, 2011. "Taxation trends in the European Union: 2011 edition," Taxation trends 2011, Directorate General Taxation and Customs Union, European Commission.
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