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Optimal Taxation in a Unionised Economy

Author

Listed:
  • Vidar Christiansen
  • Emeritus Ray Rees

Abstract

Unions appear to have an aversion to wage disparities among their members, leading to wage compression. This paper analyses the consequences of this for income tax policy. In a two-sector general equilibrium model we highlight the tradeoff between correcting the resource misallocation created by wage compression and the government’s distributional objectives. Where the union’s aversion to wage dispersion is strong, tax policy can do little to correct the distortion in the supply of trained labour, though it can come closer to achieving distributional aims. Where wage compression is less pronounced, tax policy can have significant effects on resource misallocation, at the expense of its distributional goals.

Suggested Citation

  • Vidar Christiansen & Emeritus Ray Rees, 2018. "Optimal Taxation in a Unionised Economy," CESifo Working Paper Series 6954, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_6954
    as

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    References listed on IDEAS

    as
    1. Thomas Aronsson & Tomas Sjögren, 2004. "Is the Optimal Labor Income Tax Progressive in a Unionized Economy?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 661-675, December.
    2. Allen, Franklin, 1982. "Optimal linear income taxation with general equilibrium effects on wages," Journal of Public Economics, Elsevier, vol. 17(2), pages 135-143, March.
    3. Lockwood, Ben & Slok, Torsten & Tranaes, Torben, 2000. " Progressive Taxation and Wage Setting: Some Evidence for Denmark," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 707-723, December.
    4. Oswald, Andrew J, 1985. " The Economic Theory of Trade Unions: An Introductory Survey," Scandinavian Journal of Economics, Wiley Blackwell, vol. 87(2), pages 160-193.
    5. Barth, Erling & Moene, Karl O. & Willumsen, Fredrik, 2014. "The Scandinavian model—An interpretation," Journal of Public Economics, Elsevier, vol. 117(C), pages 60-72.
    6. Nymoen, Ragnar & Rodseth, Asbjorn, 2003. "Explaining unemployment: some lessons from Nordic wage formation," Labour Economics, Elsevier, vol. 10(1), pages 1-29, February.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    income taxation; optimal taxation; unionized economy; wage compression;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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