How much has labour taxation contributed to European structural unemployment?
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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