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Productivity, Empoyment and Taxes - Evidence on the Potential Trade-offs and Impacts in the EU


  • Alho, Kari O.E.
  • Nikula, Nuutti


The paper considers time series evidence on the relationships, and possible trade-offs, between productivity and employment, and on the impact of taxes in this connection. First, a theoretical model is built for an open economy leading to the identification of technology, non-technology and tax shocks. Then structural VAR models are estimated for all the EU-15 and some other OECD countries to infer the above links. Our conclusion is that there is in the EU a fairly uniform and significant short-run negative impulse on employment from a positive productivity shock, while this becomes smaller and statistically insignificant over time in most, but not in some member countries. The former situation is interpreted to be an indication of nominal and the latter that of real or structural rigidity in the economy. In the US, there is no such trade-off, either in the short or long run. Tax shocks are found to have mostly a short-run negative effect which is stronger on productivity than on aggregate employment. However, if we separate the effects of labour taxes and corporate taxes, the former have in the EU-15 a strong negative effect on employment while the latter are fairly neutral. Second, we simulate an aggregative econometric labour market model and insert various types of shocks into it : a rise in productivity, achieved, e.g. by enhancing R&D, or by rationalising the use of labour, and a change in the tax/benefit system. We find that although there is no long-run trade-off between productivity and employment, over the medium run acceleration of productivity has a clear positive effect on employment.

Suggested Citation

  • Alho, Kari O.E. & Nikula, Nuutti, 2006. "Productivity, Empoyment and Taxes - Evidence on the Potential Trade-offs and Impacts in the EU," Discussion Papers 1054, The Research Institute of the Finnish Economy.
  • Handle: RePEc:rif:dpaper:1054

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    References listed on IDEAS

    1. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2004. "The Response of Hours to a Technology Shock: Evidence Based on Direct Measures of Technology," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 381-395, 04/05.
    2. Clarida, Richard & Gali, Jordi & Gertler, Mark, 2002. "A simple framework for international monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 879-904, July.
    3. Bean, Charles R., 1994. "European unemployment: A retrospective," European Economic Review, Elsevier, vol. 38(3-4), pages 523-534, April.
    4. Albert van der Horst, 2003. "Structural estimates of equilibrium unemployment in six OECD economies," CPB Discussion Paper 19, CPB Netherlands Bureau for Economic Policy Analysis.
    5. Jordi Gali, 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," American Economic Review, American Economic Association, vol. 89(1), pages 249-271, March.
    6. Domenico Giannone & Lucrezia Reichlin, 2006. "Does information help recovering structural shocks from past observations?," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 455-465, 04-05.
    7. Alfred V. Guender, 2006. "Stabilising Properties of Discretionary Monetary Policies in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 116(508), pages 309-326, January.
    8. Harald Uhlig, 2004. "Do Technology Shocks Lead to a Fall in Total Hours Worked?," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 361-371, 04/05.
    9. Alho, Kari, 2002. "The Equilibrium Rate of Unemployment and Policies to Lower It: The Case of Finland," Discussion Papers 839, The Research Institute of the Finnish Economy.
    10. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What Happens After a Technology Shock?," NBER Working Papers 9819, National Bureau of Economic Research, Inc.
    11. Jordi Galí, 2004. "On The Role of Technology Shocks as a Source of Business Cycles: Some New Evidence," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 372-380, 04/05.
    12. Alho, Kari, 2002. "Catching Up and Unemployment in the EU," Discussion Papers 762, The Research Institute of the Finnish Economy.
    13. Kaitila, Ville, 2006. "Productivity, Hours Worked, and Tax/Benefit Systems in Europe and Beyond," Discussion Papers 1015, The Research Institute of the Finnish Economy.
    14. Daniela Sonedda, 2006. "A structural VAR approach on labour taxation policies," Applied Economics, Taylor & Francis Journals, vol. 38(1), pages 95-114.
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    More about this item


    productivity; employment; taxes; EU;

    JEL classification:

    • O49 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Other
    • H29 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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