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Impacts of Labor Taxation with Perfectly and Imperfectly Competitive Domestic Labor Markets under Flexible Outsourcing

  • Koskela, Erkki

    ()

    (University of Helsinki)

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    What are the impacts of labor tax reform on wage setting and employment to keep the relative tax burden per low-skilled and high-skilled workers constant in the case of heterogenous domestic labor markets, i.e. imperfect competition in low-skilled labor and perfect competition in high-skilled labor in the presence of outsourcing? A higher degree of tax progression by raising the wage tax and the tax exemption for the low-skilled workers will decrease the wage rate and increase labour demand of low-skilled workers, whereas it will decrease (increase) employment of high-skilled workers in CES utility function when the elasticity of substitution between consumption and leisure is higher (lower) than one. A higher degree of wage tax progression for the high-skilled worker will have no effect on the high-skilled wage in the presence of CES and C-D utility function so this will have no total employment effects.

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    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4544.

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    Length: 37 pages
    Date of creation: Nov 2009
    Date of revision:
    Publication status: published in: Thomas J. Sargent and Jouko Vilmunen (eds.): Macroeconomics at the Service of Public Policy, Oxford University Press, 2012, 186-214
    Handle: RePEc:iza:izadps:dp4544
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    1. Robert Feenstra & Gordon Hanson, 2001. "Global Production Sharing and Rising Inequality: A Survey of Trade and Wages," NBER Working Papers 8372, National Bureau of Economic Research, Inc.
    2. Koskela, Erkki & Schöb, Ronnie, 2001. "Optimal Factor Income Taxation in the Presence of Unemployment," Discussion Papers 758, The Research Institute of the Finnish Economy.
    3. Alexander Hijzen, 2007. "International Outsourcing, Technological Change, and Wage Inequality," Review of International Economics, Wiley Blackwell, vol. 15(1), pages 188-205, 02.
    4. Choi, E. Kwan & Harrigan, James, 2003. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
    5. Alexander Hijzen & Holger Görg & Robert C. Hine, 2004. "International Outsourcing and the Skill Structure of Labour Demand in the United Kingdom," Discussion Papers of DIW Berlin 437, DIW Berlin, German Institute for Economic Research.
    6. Gorg, Holger & Hanley, Aoife, 2005. "Labour demand effects of international outsourcing: Evidence from plant-level data," International Review of Economics & Finance, Elsevier, vol. 14(3), pages 365-376.
    7. Aronsson, Thomas & Sjogren, Tomas, 2004. "Efficient taxation, wage bargaining and policy coordination," Journal of Public Economics, Elsevier, vol. 88(12), pages 2711-2725, December.
    8. Koskela, Erkki & Vilmunen, Jouko, 1996. "Tax progression is good for employment in popular models of trade union behaviour," Labour Economics, Elsevier, vol. 3(1), pages 65-80, August.
    9. Jakob Roland Munch & Jan Rose Skaksen, 2005. "Specialization, Outsourcing and Wages," Discussion Papers 05-28, University of Copenhagen. Department of Economics.
    10. Erkki Koskela & Ronnie Schöb, 2010. "Outsourcing of Unionized Firms and the Impact of Labor Market Policy Reforms," Review of International Economics, Wiley Blackwell, vol. 18(4), pages 682-695, 09.
    11. Hartmut Egger & Peter Egger, 2006. "International Outsourcing and the Productivity of Low-Skilled Labor in the EU," Economic Inquiry, Western Economic Association International, vol. 44(1), pages 98-108, January.
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    14. Eckel, Carsten & Egger, Hartmut, 2009. "Wage bargaining and multinational firms," Munich Reprints in Economics 20528, University of Munich, Department of Economics.
    15. Sebastian Braun & Juliane Scheffel, 2007. "Does International Outsourcing Depress Union Wages?," SFB 649 Discussion Papers SFB649DP2007-033, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    16. Ethier, Wilfred J., 2005. "Globalization, globalisation: Trade, technology, and wages," International Review of Economics & Finance, Elsevier, vol. 14(3), pages 237-258.
    17. Slaughter, Matthew J., 2001. "International trade and labor-demand elasticities," Journal of International Economics, Elsevier, vol. 54(1), pages 27-56, June.
    18. Hans-Werner Sinn, 2007. "The Welfare State and the Forces of Globalization," CESifo Working Paper Series 1925, CESifo Group Munich.
    19. Ingo Geishecker & Holger Görg, 2008. "Winners and losers: a micro-level analysis of international outsourcing and wages," Canadian Journal of Economics, Canadian Economics Association, vol. 41(1), pages 243-270, February.
    20. Jan Rose Skaksen, 2004. "International outsourcing when labour markets are unionized," Canadian Journal of Economics, Canadian Economics Association, vol. 37(1), pages 78-94, February.
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