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Does Centralised Wage Setting Lead into Higher Taxation

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Author Info

  • Juha Kilponen

    (Bank of Finland)

  • Pekka Sinko

    (Prime Minister's Office)

Abstract

This 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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File URL: http://128.118.178.162/eps/lab/papers/0509/0509013.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Labor and Demography with number 0509013.

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Length: 25 pages
Date of creation: 30 Sep 2005
Date of revision:
Handle: RePEc:wpa:wuwpla:0509013

Note: Type of Document - pdf; pages: 25
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Web page: http://128.118.178.162

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Keywords: Taxation; wage setting; public expenditure; median voter;

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References

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  1. Jaakko Kiander & Juha Kilponen & Jouko Vilmunen, 2000. "Taxes, Growth and Unemployment in the OECD Countries - Does Collective Bargaininig Matter?," Discussion Papers 235, Government Institute for Economic Research Finland (VATT).
  2. Koskela, Erkki & Schob, Ronnie, 1999. "Alleviating unemployment:: The case for green tax reforms," European Economic Review, Elsevier, vol. 43(9), pages 1723-1746, October.
  3. Daniele Checchi & Claudio Lucifora, 2002. "Unions and labour market institutions in Europe," Departmental Working Papers 2002-16, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  4. Driffill, John & van der Ploeg, Frederick, 1993. "Monopoly Unions and the Liberalisation of International Trade," Economic Journal, Royal Economic Society, vol. 103(417), pages 379-85, March.
  5. Pekka Sinko, 1999. "Taxation, Employment and the Environment - General Equilibrium Analysis with Unionised Labour Markets," Research Reports 54, Government Institute for Economic Research Finland (VATT).
  6. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR & CES & MSH, vol. 15(30), pages 47-104, 04.
  7. Pekka Sinko & Juha Kilponen, 2001. "Labour Taxation and the Degree of Centralisation in a Trade Union Model with Endogenous Labour Supply," Discussion Papers 250, Government Institute for Economic Research Finland (VATT).
  8. 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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Cited by:
  1. 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.
  2. Alfonso Arpaia & Giuseppe Carone, 2004. "Do labour taxes (and their composition) affect wages in the short and in the long run?," Public Economics 0411004, EconWPA.

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