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Is tax progression really good for employment? A model with endogenous hours of work

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  • Fuest, Clemens
  • Huber, Bernd

Abstract

This paper discusses the effect of tax progression on wage setting and employment in a unionised labour market. Recent contributions to this field argue that tax progression paradoxically enhances employment if wage setting is subject to collective bargaining. In this literature, individual hours of work are usually assumed to be exogenously given. We show that the positive employment effect of tax progression can be generalized to a model with a positive labour supply elasticity of individual workers. However, the wage-moderating effect of tax progression does not unambiguously carry over to a world where the union may fix both wages and individual hours of work. In this framework, the union reacts to tax progression by cutting individual working time. The wage rate, however, may decrease or increase. If the wage rate increases, the number of employed workers may decline despite the reduction in hours of work.

Suggested Citation

  • Fuest, Clemens & Huber, Bernd, 2000. "Is tax progression really good for employment? A model with endogenous hours of work," Munich Reprints in Economics 20296, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenar:20296
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    References listed on IDEAS

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    7. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
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    11. Booth, Alison & Ravallion, Martin, 1993. "Employment and Length of the Working Week in a Unionized Economy in which Hours of Work Influence Productivity," The Economic Record, The Economic Society of Australia, vol. 69(207), pages 428-436, December.
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    Cited by:

    1. Houben, Henriette & Baumgarten, Jörg, 2011. "Krankt das deutsche Steuersystem am Mittelstandsbauch und der kalten Progession?," arqus Discussion Papers in Quantitative Tax Research 119, arqus - Arbeitskreis Quantitative Steuerlehre.
    2. Holmlund Bertil & Söderström Martin, 2011. "Estimating Dynamic Income Responses to Tax Reform," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-38, November.
    3. Bertil Holmlund, 2002. "Labor Taxation in Search Equilibrium with Home Production," German Economic Review, Verein für Socialpolitik, vol. 3(4), pages 415-430, November.
    4. Etienne Lehmann & Claudio Lucifora & Simone Moriconi & Bruno Van der Linden, 2016. "Beyond the labour income tax wedge: the unemployment-reducing effect of tax progressivity," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(3), pages 454-489, June.
    5. Kjell Erik Lommerud & Bjørn Sandvik & Odd Rune Straume, 2004. "Good Jobs, Bad Jobs and Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 703-720, December.
    6. Alexis, PARMENTIER, 2006. "The effects of the marginal tax rate in a matching model with endogenous labor supply," Discussion Papers (ECON - Département des Sciences Economiques) 2006011, Université catholique de Louvain, Département des Sciences Economiques.
    7. Etienne Lehmann & Bruno Van Der Linden, 2007. "On the Optimality of Search Matching Equilibrium When Workers Are Risk Averse," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(5), pages 867-884, October.
    8. Daniela Sonedda, 2009. "The Output Effects of Labor Income Taxes in OECD Countries," Public Finance Review, , vol. 37(6), pages 686-709, November.
    9. Bertil Holmlund & Martin Söderström, 2007. "Estimating Income Responses to Tax Changes: A Dynamic Panel Data Approach," CESifo Working Paper Series 2121, CESifo Group Munich.
    10. Knabe, Andreas, 2009. "Implementing endogenous inside options in Nash wage bargaining models," Mathematical Social Sciences, Elsevier, vol. 57(2), pages 161-176, March.
    11. Goerke, Laszlo, 2004. "Tax evasion, tax progression, and efficiency wages," Economics Letters, Elsevier, vol. 82(1), pages 35-42, January.
    12. José Ramón García & José Vicente Ríos, 2004. "Effects Of Tax Reforms In A Shirking Model With Union Bargaining," Working Papers. Serie AD 2004-42, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    13. Boeters, Stefan, 2011. "Optimal tax progressivity in unionised labour markets: What are the driving forces?," Economic Modelling, Elsevier, vol. 28(5), pages 2282-2295, September.
    14. Sinko, Pekka, 2004. "Progressive Taxation Under Centralised Wage Setting," Discussion Papers 349, VATT Institute for Economic Research.
    15. Laszlo Goerke, 2003. "Tax Progressivity and Tax Evasion," CESifo Working Paper Series 1097, CESifo Group Munich.
    16. Sonedda, Daniela, 2006. "Macroeconomics effects of progressive taxation in a unionized economy," Economic Modelling, Elsevier, vol. 23(1), pages 110-130, January.
    17. Immervoll, H., 2000. "Fiscal Drag - An Automatic Stabiliser?," Cambridge Working Papers in Economics 0025, Faculty of Economics, University of Cambridge.
    18. Holmlund, Bertil & Söderström, Martin, 2008. "Estimating dynamic income responses to tax reforms: Swedish evidence," Working Paper Series 2008:28, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    19. repec:eee:pubeco:v:153:y:2017:i:c:p:56-68 is not listed on IDEAS
    20. Bohringer, Christoph & Boeters, Stefan & Feil, Michael, 2005. "Taxation and unemployment: an applied general equilibrium approach," Economic Modelling, Elsevier, vol. 22(1), pages 81-108, January.
    21. Clemens Fuest & Bernd Huber, 2001. "Tax Progression and Human Capital in Imperfect Labour Markets," German Economic Review, Verein für Socialpolitik, vol. 2(1), pages 1-18, February.
    22. Bo Sandemann Rasmussen, "undated". "Efficiency Wages and the Long-Run Incidence of Progressive Taxation," Economics Working Papers 2001-5, Department of Economics and Business Economics, Aarhus University.
    23. Daniela Sonedda, 2006. "A structural VAR approach on labour taxation policies," Applied Economics, Taylor & Francis Journals, vol. 38(1), pages 95-114.
    24. Boeters, Stefan & Böhringer, Christoph & Feil, Michael, 2002. "Taxation and unemployment: an applied general equilibrium approach for Germany," ZEW Discussion Papers 02-39, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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