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Strategic fiscal policies in Europe: Why does the labour wedge matter?

Author

Listed:
  • François Langot

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université, CEPREMAP - Centre pour la recherche économique et ses applications - ECO ENS-PSL - Département d'économie de l'ENS-PSL - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres, IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics)

  • Matthieu Lemoine

    (Centre de recherche de la Banque de France - Banque de France)

Abstract

Most European countries suffer from a structural weakness in employment and competitiveness. Can an optimal tax system reinforce European countries in this respect? In this paper, we show that fiscal competition can be a welfare improving second best solution if the labour wedge is sufficiently large. Indeed, a sufficiently large labour wedge calls for an expansion of the production set in both countries, thus increasing global opportunities. For a small labour wedge, this would not be the case, because the terms-of-trade externality would call for a fiscal policy that exacerbates a non-cooperative behaviour between countries. In a two-country world, we show that the symmetric Nash equilibrium can be Pareto-efficient, if employment subsidies are financed by a consumption tax. This is not the case when the former are financed by tariffs.

Suggested Citation

  • François Langot & Matthieu Lemoine, 2017. "Strategic fiscal policies in Europe: Why does the labour wedge matter?," Post-Print hal-03969937, HAL.
    • Handle: RePEc:hal:journl:hal-03969937
    DOI: 10.1016/j.euroecorev.2016.09.005
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    References listed on IDEAS

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    Cited by:

    1. Burlon, L. & Notarpietro, A. & Pisani, M., 2021. "Fiscal devaluation and labor market frictions in a monetary union," Economic Modelling, Elsevier, vol. 97(C), pages 135-156.
    2. Zouhair Ait Benhamou, 2018. "A Steeper slope: the Laffer Tax Curve in Developing and Emerging Economies," Post-Print hal-02977714, HAL.

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    More about this item

    Keywords

    Optimal taxation; International trade; Labour wedge; General equilibrium model;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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