Does Centralised Wage Setting Lead into Higher Taxation?
AbstractThis paper studies implications of centralised wage setting for the level of taxation and public expenditures in an analytical model with unionised labour markets. We extend the previous studies by allowing 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 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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Bibliographic InfoPaper provided by EconWPA in its series Labor and Demography with number 0509007.
Date of creation: 16 Sep 2005
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Taxation; wage setting; public expenditure;
Find related papers by JEL classification:
- J - Labor and Demographic Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-09-29 (All new papers)
- NEP-PBE-2005-09-29 (Public Economics)
- NEP-POL-2005-09-29 (Positive Political Economics)
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