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How much has labour taxation contributed to European structural unemployment?

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Author Info

  • Christophe Planas

    (DG-JRC of European Commission)

  • Werner Roeger

    (DG-ECFIN of European Commission)

  • Alessandro Rossi

    (DG-JRC of European Commission)

Abstract

This paper analyses the effect of labour taxes on Euro area unemployment. Empirical estimates obtained so far can be criticised as being spurious because the regressions generally lack non-measurable variables constituting the reservation wage that can possibly be non stationary. Here we overcome this problem by using an unobserved component model. For the Euro area unemployment, we find a significant tax effect that is in the middle of the estimates that can be found in the empirical literature. This study gives support to the view that lowering labour taxes can help to reduce unemployment in continental Europe.

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File URL: http://128.118.178.162/eps/em/papers/0408/0408005.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Econometrics with number 0408005.

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Length: 22 pages
Date of creation: 17 Aug 2004
Date of revision:
Handle: RePEc:wpa:wuwpem:0408005

Note: Type of Document - pdf; pages: 22
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Web page: http://128.118.178.162

Related research

Keywords: NAIRU; Unobserved components; Kalman filter;

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References

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  1. Beyer, A. & Doornik, J.A. & Hendry, D.F., 2000. "Constructing Historical Euro-Zone Data," Economics Working Papers eco2000/10, European University Institute.
  2. Pete Richardson & Laurence Boone & Claude Giorno & Mara Meacci & David Rae & David Turner, 2000. "The Concept, Policy Use and Measurement of Structural Unemployment: Estimating a Time Varying NAIRU Across 21 OECD Countries," OECD Economics Department Working Papers 250, OECD Publishing.
  3. Silvia Fabiani & Ricardo Mestre, 2004. "A system approach for measuring the euro area NAIRU," Empirical Economics, Springer, vol. 29(2), pages 311-341, 05.
  4. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
  5. Ricardo Llaudes, 2005. "The Phillips curve and long-term unemployment," Working Paper Series 441, European Central Bank.
  6. Gerlach, Stefan & Smets, Frank, 1999. "Output gaps and monetary policy in the EMU area1," European Economic Review, Elsevier, vol. 43(4-6), pages 801-812, April.
  7. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc.
  8. Apel, Mikael & Jansson, Per, 1998. "A Theory-Consistent System Approach for Estimating Potential Output and the NAIRU," Working Paper Series 74, Sveriges Riksbank (Central Bank of Sweden).
  9. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 297-323, December.
  10. Michael Artis & Massimiliano Marcellino & Tommaso Proietti, 2004. "Dating Business Cycles: A Methodological Contribution with an Application to the Euro Area," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(4), pages 537-565, 09.
  11. Francesco Daveri, 2002. "Labor Taxes and Unemployment: a Survey of the Aggregate Evidence," CeRP Working Papers 18, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  12. Olivier Jean Blanchard & Lawrence Katz, 1999. "Wage Dynamics: Reconciling Theory and Evidence," NBER Working Papers 6924, National Bureau of Economic Research, Inc.
  13. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR & CES & MSH, vol. 15(30), pages 47-104, 04.
  14. Mikael Apel & Per Jansson, 1999. "System estimates of potential output and the NAIRU," Empirical Economics, Springer, vol. 24(3), pages 373-388.
  15. Douglas Staiger & James H. Stock & Mark W. Watson, 1996. "How Precise are Estimates of the Natural Rate of Unemployment?," NBER Working Papers 5477, National Bureau of Economic Research, Inc.
  16. Durbin, James & Koopman, Siem Jan, 2001. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, number 9780198523543, July.
  17. Edward C. Prescott, 2002. "Prosperity and Depression," American Economic Review, American Economic Association, vol. 92(2), pages 1-15, May.
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Citations

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Cited by:
  1. Berger, Tino & Everaert, Gerdie, 2010. "Labour taxes and unemployment evidence from a panel unobserved component model," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 354-364, March.
  2. J.E. Bosca & R. Domenech & J. Ferri, 2009. "Tax Reforms and Labour-market Performance. An Evaluation for Spain using REMS," Working Papers 0910, BBVA Bank, Economic Research Department.
  3. Sachs, Andreas, 2010. "A Bayesian approach to determine the impact of institutions on the unemployment rate," ZEW Discussion Papers 10-058, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Mária Lackó, 2004. "Tax Rates and Corruption: Labour-market and Fiscal Effects. Empirical cross-country comparisons on OECD and transition countries," wiiw Research Reports 309, The Vienna Institute for International Economic Studies, wiiw.
  5. Stephen Nickell, 2003. "Employment and Taxes," CESifo Working Paper Series 1109, CESifo Group Munich.
  6. Alfonso Arpaia & Giuseppe Carone, 2004. "Do labour taxes (and their composition) affect wages in the short and the long run? - Alfonso Arpaia and Giuseppe Carone," European Economy - Economic Papers 216, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  7. T. Berger & F. Heylen, 2009. "Differences in hours worked in the OECD: institutions or fiscal policies?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/601, Ghent University, Faculty of Economics and Business Administration.
  8. Gelauff, George & Lejour, Arjan, 2006. "The new Lisbon Strategy: An estiamtion of the impact of reaching 5 Lisbon targets," MPRA Paper 16168, University Library of Munich, Germany.
  9. Christophe Planas & Alessandro Rossi & Gabriele Fiorentini, 2008. "The marginal likelihood of Structural Time Series Models, with application to the euroareaa nd US NAIRU," Working Paper Series 21-08, The Rimini Centre for Economic Analysis, revised Jan 2008.

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