Tax-overshifting in wage bargaining models
It has frequently been noted in the wage bargaining literature that increasing average labour taxes may in fact be over-shifted in the pre-tax wage that is negotiated between unions and firms, raising workers post-tax wages. In this paper, we study the precise conditions for such tax over-shifting to occur under several different bargaining structures, and considering both competitive and imperfectly competitive output market conditions. In the case of competitive output markets and Nash bargaining over wages and employment, over-shifting is shown to hold for an entire class of commonly used concave production functions for which the divergence between marginal and average product is increasing in employment. Under right-to-manage bargaining, tax over-shifting is shown to depend on the curvature of the labour demand curve and on the wage elasticity of the firm’s profits relative to the wage elasticity of labour demand. We further show that, under plausible assumptions, tax over-shifting is more likely to occur under monopolistically competitive output markets than under perfect competition; this holds for all bargaining models considered.
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