Does Centralised Wage Setting Lead into Higher Taxation
AbstractThis 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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Bibliographic InfoPaper provided by EconWPA in its series Labor and Demography with number 0509013.
Length: 25 pages
Date of creation: 30 Sep 2005
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Taxation; wage setting; public expenditure; median voter;
Other versions of this item:
- Pekka Sinko & Juha Kilponen, 2003. "Does Centralised Wage Setting Lead into Higher Taxation?," Discussion Papers 314, Government Institute for Economic Research Finland (VATT).
- J - Labor and Demographic Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-08 (All new papers)
- NEP-BEC-2005-10-08 (Business Economics)
- NEP-PBE-2005-10-08 (Public Economics)
- NEP-POL-2005-10-08 (Positive Political Economics)
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