IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/1681.html
   My bibliography  Save this paper

Unemployment, Growth and Taxation in Industrial Countries

Author

Listed:
  • Daveri, Francesco
  • Tabellini, Guido

Abstract

To the layperson, the upward trend in European unemployment is related to the slowdown in economic growth. We argue that the layperson’s view is correct. The increase in European unemployment and the slowdown in economic growth are related because they stem from a common cause: an excessively high cost of labour. In Europe, labour costs have gone up for many reasons, but one is particularly easy to identify: higher taxes on labour. If wages are set by strong and centralized trade unions, an increase in labour taxes is shifted onto higher real wages. This has two effects. First, it reduces labour demand, and thus creates unemployment. Second, as firms substitute capital for labour, the marginal product of capital falls; over long periods of time, this in turn diminishes the incentive to accumulate and thus to grow. Thus high unemployment is associated with low growth rates. The model also predicts that the effect of labour taxation differs sharply in countries with different labour market institutions. We test these predictions on data for 14 industrial countries between 1965 and 1991, and find striking support for them. In particular, labour taxes have a strong positive effect on unemployment only in Europe and not in other industrial countries. The observed rise of about 9 percentage points in labour tax rates can account for a reduction of the EU growth rate of about 0.4 percentage points a year, about one-third of the observed reduction in growth between 1965–75 and 1976–91, and a rise in unemployment of about 4 percentage points.

Suggested Citation

  • Daveri, Francesco & Tabellini, Guido, 1997. "Unemployment, Growth and Taxation in Industrial Countries," CEPR Discussion Papers 1681, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1681
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1681
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    More about this item

    Keywords

    Growth; Labour Markets; Taxation; Unemployment;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J0 - Labor and Demographic Economics - - General
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:1681. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.