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The Tax System Incidence on Unemployment: A Country-Specific Analysis for the OECD Economies

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  • García, José Ramón

    ()
    (Universidad de Valencia)

  • Sala, Hector

    ()
    (Universitat Autònoma de Barcelona)

Abstract

This paper provides a detailed analysis on the incidence of the tax structure on the labor market. To do so it goes beyond the traditional examination of the ‘level’ effect of the fiscal wedge and considers a ‘composition’ effect defined as a payroll tax bias (PTB): the proportion of payroll taxes paid by employees with respect to the one paid by firms. We develop a right-to-manage model encompassing different wage bargaining systems and the incidence of different type of taxes. Controlling for demand-side and supply-side determinants of unemployment, we show that the PTB plays a significant role in explaining unemployment in the continental European countries, but not in the Nordic nor the Anglo-Saxon ones. We also show that there is no relationship between the incidence of the PTB and unemployment persistence, even though there is a positive one with respect to the level of the fiscal wedge.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2226.

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Length: 28 pages
Date of creation: Jul 2006
Date of revision:
Publication status: published in: Economic Modelling, 2008, 25 (6), 1232-1245
Handle: RePEc:iza:izadps:dp2226

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Keywords: unemployment persistence; fiscal wedge; payroll tax bias; unemployment;

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References

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  1. Michèle Belot & Jan C. van Ours, 2004. "Does the recent success of some OECD countries in lowering their unemployment rates lie in the clever design of their labor market reforms?," Oxford Economic Papers, Oxford University Press, vol. 56(4), pages 621-642, October.
  2. García, José Ramón & Sala, Hector, 2006. "The Tax System Incidence on Unemployment: A Country-Specific Analysis for the OECD Economies," IZA Discussion Papers 2226, Institute for the Study of Labor (IZA).
  3. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, September.
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  23. Nickell, Stephen, 1982. "Wages and Unemployment: A General Framework," Economic Journal, Royal Economic Society, vol. 92(365), pages 51-55, March.
  24. Summers, Lawrence H & Gruber, Jonathan & Vergara, Rodrigo, 1993. "Taxation and the Structure of Labor Markets: The Case of Corporatism," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 385-411, May.
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Blog mentions

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  1. Ideology in action
    by chris dillow in Stumbling and Mumbling on 2010-04-04 09:46:31
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Cited by:
  1. García, José Ramón & Sala, Hector, 2008. "The tax system incidence on unemployment: A country-specific analysis for the OECD economies," Economic Modelling, Elsevier, vol. 25(6), pages 1232-1245, November.
  2. Flaig, Gebhard & Rottmann, Horst, 2013. "Labour market institutions and unemployment: An international panel data analysis," Munich Reprints in Economics 20367, University of Munich, Department of Economics.
  3. Alexei Izyumov, 2010. "Human Costs of Post-communist Transition: Public Policies and Private Response," Review of Social Economy, Taylor & Francis Journals, vol. 68(1), pages 93-125.
  4. Primož Dolenc & Suzana Laporšek, 2010. "Tax Wedge on Labour and its Effect on Employment Growth in the European Union," Prague Economic Papers, University of Economics, Prague, vol. 2010(4), pages 344-358.

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