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Unions, Labour supply and Structure of Taxation: Equal Tax Bases

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  • Kiander, Jaakko
  • Holm Pasi, Koskela Erkki

Abstract

This paper investigates the employment effects of changes in the structure of taxation and in the tax progression. The contribution is to add endogenous determination of working hours into a union wage setting model. Thus employment effects of any changes in taxation are derived as a labour supply response of workers to tax-induced changes in equilibrium wage. The main findings are the following: i) When hours and heads are perfect substitutes in production, introducing income tax progression at the margin decreases the gross wage rate. If, in addition, leisure is a normal good and wage elasticity of labour supply positive, then hours of work decreases and employment is boosted. ii) Restructuring labour taxation away from payroll tax leaves the gross wage rate, hours of work and employment unchanged, when the income tax base and the payroll tax base are equal. This equality holds when there is a given exemption from income taxes.

Suggested Citation

  • Kiander, Jaakko & Holm Pasi, Koskela Erkki, 1995. "Unions, Labour supply and Structure of Taxation: Equal Tax Bases," Discussion Papers 110, Government Institute for Economic Research Finland (VATT).
  • Handle: RePEc:fer:dpaper:110
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    File URL: https://www.doria.fi/handle/10024/148099
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    References listed on IDEAS

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    1. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
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    3. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, pages 573-619.
    4. Laurence M. Ball, 1997. "Disinflation and the NAIRU," NBER Chapters,in: Reducing Inflation: Motivation and Strategy, pages 167-194 National Bureau of Economic Research, Inc.
    5. Setterfield, M. A. & Gordon, D. V. & Osberg, L., 1992. "Searching for a will o' the wisp : An empirical study of the NAIRU in Canada," European Economic Review, Elsevier, vol. 36(1), pages 119-136, January.
    6. Jørgen Elmeskov, 1993. "High and Persistent Unemployment: Assessment of the Problem and Its Causes," OECD Economics Department Working Papers 132, OECD Publishing.
    7. Lafontaine, Francine & White, Kenneth J., 1986. "Obtaining any Wald statistic you want," Economics Letters, Elsevier, vol. 21(1), pages 35-40.
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    Cited by:

    1. Alfonso ARPAIA & Giuseppe CARONE, "undated". "Do Labour Taxes (and their Composition) Affect Wages in the Short and the Long Run?," EcoMod2004 330600010, EcoMod.
    2. Pekka Sinko & Juha Kilponen, 2003. "Does Centralised Wage Setting Lead into Higher Taxation?," Discussion Papers 314, Government Institute for Economic Research Finland (VATT).
    3. Pekka Sinko, 2005. "Does Centralised Wage Setting Lead into Higher Taxation?," Labor and Demography 0509007, EconWPA.
    4. Pekka Sinko & Juha Kilponen, 2001. "Labour Taxation and the Degree of Centralisation in a Trade Union Model with Endogenous Labour Supply," Discussion Papers 250, Government Institute for Economic Research Finland (VATT).
    5. Goerke, Laszlo, 2000. "The Wedge," Manchester School, University of Manchester, vol. 68(5), pages 608-623, September.
    6. Alfonso Arpaia & Giuseppe Carone, 2004. "Do labour taxes (and their composition) affect wages in the short and the long run? - Alfonso Arpaia and Giuseppe Carone," European Economy - Economic Papers 2008 - 2015 216, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    7. Alfonso Arpaia & Giuseppe Carone, 2004. "Do labour taxes (and their composition) affect wages in the short and in the long run?," Public Economics 0411004, EconWPA.

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