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Efficiency Wages and the Long-Run Incidence of Progressive Taxation

Author

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  • Bo Sandemann Rasmussen

    () (Department of Economics, University of Aarhus, Denmark)

Abstract

Progressive income taxation has for some time been recognized to provide incentives for wage restraint in models with imperfectly competitive labour markets. Recent research has established that bargaining over individual working hours may reverse the wage restraining effect such that increased tax progression may reduce employment. In the present paper an alternative explanation for such adverse employment effects is suggested. Using an efficiency wage model it is shown that long-run adjustment in the number of firms to changes in profits may imply that an increase in tax progression has adverse employment effects when all the budgetary effects of the tax reform are taken into account.

Suggested Citation

  • Bo Sandemann Rasmussen, "undated". "Efficiency Wages and the Long-Run Incidence of Progressive Taxation," Economics Working Papers 2001-5, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:aarhec:2001-5
    as

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    File URL: ftp://ftp.econ.au.dk/afn/wp/01/wp01_5.pdf
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    References listed on IDEAS

    as
    1. Fuest, Clemens & Huber, Bernd, 2000. "Is tax progression really good for employment? A model with endogenous hours of work," Labour Economics, Elsevier, vol. 7(1), pages 79-93, January.
    2. Bulkley, George & Myles, Gareth D, 1996. "Trade Unions, Efficiency Wages, and Shirking," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 75-88, January.
    3. Pisauro, Giuseppe, 1991. "The effect of taxes on labour in efficiency wage models," Journal of Public Economics, Elsevier, vol. 46(3), pages 329-345, December.
    4. Rasmussen, Bo Sandemann, 1998. "Long run effects of employment and payroll taxes in an efficiency wage model," Economics Letters, Elsevier, vol. 58(2), pages 245-253, February.
    5. Hansen, Claus Thustrup, 1999. " Lower Tax Progression, Longer Hours and Higher Wages," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(1), pages 49-65, March.
    6. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    7. Koskela, Erkki & Vilmunen, Jouko, 1996. "Tax progression is good for employment in popular models of trade union behaviour," Labour Economics, Elsevier, vol. 3(1), pages 65-80, August.
    8. Clemens Fuest & Bernd Huber, 1998. "Efficiency wages, employment, and the marginal income-tax rate: A note," Journal of Economics, Springer, vol. 68(1), pages 79-84, February.
    9. Albrecht, James W & Vroman, Susan B, 1999. "Unemployment Compensation Finance and Efficiency Wages," Journal of Labor Economics, University of Chicago Press, vol. 17(1), pages 141-167, January.
    10. Johnson, G.E. & Layard, P.R.G., 1987. "The natural rate of unemployment: Explanation and policy," Handbook of Labor Economics,in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 2, chapter 16, pages 921-999 Elsevier.
    11. Michael Hoel, 1990. "Efficiency wages and income taxes," Journal of Economics, Springer, vol. 51(1), pages 89-99, February.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Efficiency wages; employment; progressive taxation; balanced budget tax reforms; long-run equilibrium;

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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