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Analysis of Labor Tax Progression under Heterogeneous Domestic Labor Markets and Flexible Outsourcing

  • Erkki Koskela
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    What are the impacts of labor tax reform on wage setting and employment to keep the relative tax burden per low-skilled and high-skilled workers constant in the case of heterogeneous domestic labor markets, i.e. imperfect competition in low-skilled labor and perfect competition in high-skilled labor in the presence of outsourcing? A higher degree of tax progression by raising the wage tax and the tax exemption for the low-skilled workers will decrease the wage rate and increase labor demand of low-skilled workers, whereas it will decrease (increase) employment of high-skilled workers in CES utility function when the elasticity of substitution between consumption and leisure is higher (lower) than one. A higher degree of wage tax progression for the high-skilled worker will have no effect on the high-skilled wage in the presence of CES utility function.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-11/cesifo1_wp3239.pdf
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    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3239.

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    Date of creation: 2010
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    Handle: RePEc:ces:ceswps:_3239
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    1. Rana Hasan & Devashish Mitra & K.V. Ramaswamy, 2003. "Trade Reforms, Labor Regulations and Labor-Demand Elasticities: Empirical Evidence from India," Economics Study Area Working Papers 59, East-West Center, Economics Study Area.
    2. Koskela, Erkki & Schob, Ronnie, 2002. " Optimal Factor Income Taxation in the Presence of Unemployment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(3), pages 387-404.
    3. Hartmut Egger & Peter Egger, . "International Outsourcing and the Productivity of Low-skilled Labour in the EU," WIFO Working Papers 152, WIFO.
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    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. Hans-Werner Sinn, 2007. "The Welfare State and the Forces of Globalization," NBER Working Papers 12946, National Bureau of Economic Research, Inc.
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    14. Aronsson, Thomas & Sjogren, Tomas, 2004. "Efficient taxation, wage bargaining and policy coordination," Journal of Public Economics, Elsevier, vol. 88(12), pages 2711-2725, December.
    15. Slaughter, Matthew J., 2001. "International trade and labor-demand elasticities," Journal of International Economics, Elsevier, vol. 54(1), pages 27-56, June.
    16. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, June.
    17. R. A. Musgrave & Tun Thin, 1948. "Income Tax Progression, 1929-48," Journal of Political Economy, University of Chicago Press, vol. 56, pages 498.
    18. Geishecker, Ingo & Görg, Holger, 2007. "Winners and losers: A Micro-level Analysis of International Outsourcing and Wages," CEPR Discussion Papers 6484, C.E.P.R. Discussion Papers.
    19. Jan Rose Skaksen, 2004. "International outsourcing when labour markets are unionized," Canadian Journal of Economics, Canadian Economics Association, vol. 37(1), pages 78-94, February.
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