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The Tax System Incidence on Unemployment: A Country-Specific Analysis for the OECD Economies

  • García, José Ramón

    ()

    (Universidad de Valencia)

  • Sala, Hector

    ()

    (Universitat Autònoma de Barcelona)

This paper provides a detailed analysis on the incidence of the tax structure on the labor market. To do so it goes beyond the traditional examination of the ‘level’ effect of the fiscal wedge and considers a ‘composition’ effect defined as a payroll tax bias (PTB): the proportion of payroll taxes paid by employees with respect to the one paid by firms. We develop a right-to-manage model encompassing different wage bargaining systems and the incidence of different type of taxes. Controlling for demand-side and supply-side determinants of unemployment, we show that the PTB plays a significant role in explaining unemployment in the continental European countries, but not in the Nordic nor the Anglo-Saxon ones. We also show that there is no relationship between the incidence of the PTB and unemployment persistence, even though there is a positive one with respect to the level of the fiscal wedge.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2226.

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Length: 28 pages
Date of creation: Jul 2006
Date of revision:
Publication status: published in: Economic Modelling, 2008, 25 (6), 1232-1245
Handle: RePEc:iza:izadps:dp2226
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  1. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March.
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