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Wage formation by majority voting and the incentive effects of pensions and taxation

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  • Jukka Lassila

    (The Research Institute of the Finnish Economy, Finland)

Abstract

We study median voter wage-setting and its dependence on pensions and taxation in a centralized monopoly union framework using a dynamic computable general equilibrium model with overlapping generations structure. We show that the higher is the earnings-related PAYG pension benefit level, the lower is the wage the voter chooses, for two reasons. Firstly, if the voter claims high current wages his lifetime wage income falls, which will lead to lower pensions, and the advantages of lower pension contributions go to future working generations. Secondly, the median voter has to pay higher contributions both because the current wage bill falls and because current pensions may increase due to indexation. Both these generational effects lead the median voter to choose lower wages, which leads to higher employment. When we compare median voter wage setting with labour markets where wages adjust to equate supply and demand, the difference is bigger when the incentives to work are stronger in the market equilibrium, and gets smaller when the incentives are weaker. When e.g. the pension benefits and the corresponding payroll tax are increased, the voting equilibrium wage level approaches the market equilibrium wage. Similar results are obtained with respect to labour and consumption taxes.

Suggested Citation

  • Jukka Lassila, 2000. "Wage formation by majority voting and the incentive effects of pensions and taxation," Finnish Economic Papers, Finnish Economic Association, vol. 13(2), pages 89-115, Autumn.
  • Handle: RePEc:fep:journl:v:13:y:2000:i:2:p:89-115
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    References listed on IDEAS

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    Cited by:

    1. Jukka Lassila & Tarmo Valkonen, 2001. "Pension Prefunding, Ageing, and Demographic Uncertainty," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 573-593, August.
    2. Lassila, Jukka & Valkonen, Tarmo, 2001. "Ageing, Demographic Risks, and Pension Reform," Discussion Papers 765, The Research Institute of the Finnish Economy.

    More about this item

    JEL classification:

    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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