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The effect of labour taxes on labour demand: a comparison between Belgium and neighbouring countries

Author

Listed:
  • Laenen, Wout
  • Moons, Cindy

    (Hogeschool-Universiteit Brussel (HUB), Belgium)

  • Persyn, Damiaan

    (LICOS and VIVES, KULeuven, Faculty of Business and Economics, Leuven, Belgium)

Abstract

This study examines the evolution of labour costs and taxes in Belgium and neighbouring countries. We try to clarify the common issues in the current debate concerning labour costs and labour demand in Belgium and neighbouring countries and investigate the influence of labour costs on employment by using macroeconomic OECD data. We conclude that the tax wedge in Belgium is one of the highest of all OECD countries. Labour costs in Belgium rose at a moderate tempo, but labour productivity evolved less favourably compared with neighbouring countries. Belgian unit labour costs, considered as an indicator of competitiveness, evolved unfavourably. By using a dynamic error correction model we find a statistically significant but limited negative relation between labour costs and employment. A decrease in labour costs of 10% results in an increase of employment of only 1.3%, which indicates a strongly inelastic labour demand. In contrast to studies based on microeconomic data, which find generally higher wage elasticities, on the basis of this study no decisive elements can be found to question the rationale of the current wage indexation mechanism.

Suggested Citation

  • Laenen, Wout & Moons, Cindy & Persyn, Damiaan, 2011. "The effect of labour taxes on labour demand: a comparison between Belgium and neighbouring countries," Working Papers 2011/25, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
    • Handle: RePEc:hub:wpecon:201125
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    References listed on IDEAS

    as
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    3. Sneessens, Henri R & Dreze, Jacques H, 1986. "A Discussion of Belgian Unemployment, Combining Traditional Concepts and Disequilibrium Econometrics," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages 89-119, Supplemen.
    4. Naastepad, C. W. M. & Kleinknecht, Alfred, 2004. "The Dutch productivity slowdown: the culprit at last?," Structural Change and Economic Dynamics, Elsevier, vol. 15(2), pages 137-163, June.
    5. Hamermesh, Daniel S & Pfann, Gerard A, 1996. "Turnover and the Dynamics of Labour Demand," Economica, London School of Economics and Political Science, vol. 63(251), pages 359-367, August.
    6. Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, vol. 55(5), pages 1035-1056, September.
    7. European Commission, 2009. "Taxation trends in the European Union: 2009 edition," Taxation trends 2009, Directorate General Taxation and Customs Union, European Commission.
    8. European Commission, 2011. "Taxation trends in the European Union: 2011 edition," Taxation trends 2011, Directorate General Taxation and Customs Union, European Commission.
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    Keywords

    economic history; ECSC; European Integration; regional concentration;
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