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Employee protection and the tax sensitivity of wages: International evidence

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  • Li, Guangzhong
  • Wu, Cen
  • Zheng, Ying

Abstract

This study examines whether employment protection legislation (EPL) affects the tax sensitivity of wages in an international setting. Using data on staggered corporate income tax changes across 18 OECD countries and a difference-in-differences approach, we find that tax hikes have a negative effect but tax cuts have no significant effect on changes in average employee wages. Stringent EPL can reduce the tax burden shifted to employees when the tax rate rises, especially in firms domiciled in countries with weaker investor protection. However, the effects of stringent EPL are insignificant when the tax rate falls. Further analyses show that EPL has more significant effects on the tax sensitivity of wages for more profitable and smaller firms. Our empirical results support the theoretical prediction that when tax-induced rents are distributed among shareholders and employees, the latter benefit from an improved bargaining position through stringent employee protection.

Suggested Citation

  • Li, Guangzhong & Wu, Cen & Zheng, Ying, 2020. "Employee protection and the tax sensitivity of wages: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 66(C).
  • Handle: RePEc:eee:intfin:v:66:y:2020:i:c:s1042443120300822
    DOI: 10.1016/j.intfin.2020.101198
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    More about this item

    Keywords

    Employee protection; Wage; Bargaining power; Tax hike; Tax cut;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J53 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Labor-Management Relations; Industrial Jurisprudence
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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