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Do labour taxes (and their composition) affect wages in the short and in the long run?

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  • Alfonso Arpaia

    (ECFIN, European Commission)

  • Giuseppe Carone

    (ECFIN, European Commission)

Abstract

Measures aimed at reducing the tax burden on labour have been advocated to alleviate the EU unemployment problem. Most of the analyses document a relationship between the unemployment rate and the tax burden on labour. Hence, it is not possible to discern whether the effect on unemployment derives from labour demand, labour supply or through the wage formation mechanism. Moreover, the empirical analyses are usually static, and may be indicative of the steady-state determinants of the unemployment rate and do not reveal the features of the adjustment process. This paper studies the relationship between labour taxes and labour costs by modelling the wage formation mechanism in a dynamic context. We test if the composition of labour taxes affects labour costs in the short- and in the long-run and whether highly centralised bargaining systems have better employment performance than decentralised ones. We apply static and dynamic panel data techniques to a panel of EU countries. Our findings suggest that there is probably some wage resistance in the short-term but not in the long-term, although the transition to the long-term can be very long and therefore the short- term impact and the dynamics of adjustment can be long-lasting.

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Bibliographic Info

Paper provided by EconWPA in its series Public Economics with number 0411004.

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Length: 61 pages
Date of creation: 12 Nov 2004
Date of revision:
Handle: RePEc:wpa:wuwppe:0411004

Note: Type of Document - pdf; pages: 61
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Web page: http://128.118.178.162

Related research

Keywords: Taxation; tax wedge; tax incidence; labour costs; wage resistance; employment; dynamic panel data; social security contributions.;

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References

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Citations

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Cited by:
  1. Ángel Melguizo & José González-Páramo, 2013. "Who bears labour taxes and social contributions? A meta-analysis approach," SERIEs, Spanish Economic Association, vol. 4(3), pages 247-271, August.
  2. Carone, Giuseppe & Nicodème, Gaëtan & Schmidt, Jan, 2007. "Tax revenues in the European Union: Recent trends and challenges ahead," MPRA Paper 3996, University Library of Munich, Germany.
  3. Sandrine Levasseur, 2011. "Labour market adjustments in Estonia during the global crisis," Sciences Po publications 2011-25, Sciences Po.
  4. European Commission, 2011. "Tax Reforms in EU Member States 2011: tax policy challenges for economic growth and fiscal sustainability," Taxation Papers 28, Directorate General Taxation and Customs Union, European Commission.
  5. Elisabetta Croci Angelini & Francesco Farina, . "Wage Inequality in Europe: the Role of Labour Market and Redistributive Institutions," Department of Economics University of Siena 463, Department of Economics, University of Siena.
  6. Coenen, Günter & McAdam, Peter & Straub, Roland, 2008. "Tax reform and labour-market performance in the euro area: A simulation-based analysis using the New Area-Wide Model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2543-2583, August.
  7. European Commission, 2010. "Taxation trends in the European Union: 2010 edition," Taxation trends 2010, Directorate General Taxation and Customs Union, European Commission.
  8. José Emilio Boscá & Rafael Domenech & Javier Ferri, 2009. "Tax reforms and labour-market performance: An evaluation for Spain using REMS," Working Papers 0910, BBVA Bank, Economic Research Department.
  9. Tehmina S. Khan & John Norregaard, 2007. "Tax Policy," IMF Working Papers 07/274, International Monetary Fund.
  10. Sandrine LEVASSEUR, 2012. "Labour market adjustments in Estonia during the 2008/2011 crisis," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 3, pages 123-143, June.
  11. Peter Egger & Doina Radulescu & Nora Strecker, 2013. "Effective labor taxation and the international location of headquarters," International Tax and Public Finance, Springer, vol. 20(4), pages 631-652, August.
  12. Sandrine Levasseur, 2011. "labour markets adjustments in Estonia during the global crisis," Documents de Travail de l'OFCE 2011-25, Observatoire Francais des Conjonctures Economiques (OFCE).

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