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The Effects of Tax Wedges on Hours Worked and Unemployment in Sweden

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  • Alun H. Thomas

Abstract

The paper investigates the relationship between labor taxation and unemployment in Sweden by estimating a labor market model that includes a wage-setting locus and labor demand and supply relationships. The study simulates the effect of a 1 percentage point increase in the payroll tax and in total tax rates. The increase in the payroll tax pushes up labor costs by about ½ percent over a 5–10 year time horizon. Hours worked fall by 0.5 percent and the unemployment rate rises by 0.3 percentage point. The increase in total tax rates generates a similar result. Therefore, it appears that increases in taxes have adversely affected employment and unemployment in Sweden.

Suggested Citation

  • Alun H. Thomas, 1998. "The Effects of Tax Wedges on Hours Worked and Unemployment in Sweden," IMF Working Papers 98/152, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:98/152
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    References listed on IDEAS

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