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Productivity, Employment and Taxes - A SVAR Analysis of Trade-offs and Impacts

  • Alho, Kari
  • Nikula, Nuutti
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    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 labour and capital tax wedge shocks, as based on their long-run effects. Then structural VAR models are estimated for the EU-15 and some other OECD countries to infer the above relationships. 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. The impulse response of the shocks in the tax wedge on labour in the aggregate EU-15 is a fairly sizeable negative impact on employment both in the short and long run, and the effects of capital income tax shocks are negative on productivity. In the majority of the individual EU-15 countries these results are not, however, statistically significant.

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    Paper provided by The Research Institute of the Finnish Economy in its series Discussion Papers with number 1074.

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    Length: 19 pages
    Date of creation: 2007
    Date of revision:
    Handle: RePEc:rif:dpaper:1074
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    1. Richard Clarida & Jordi Gali & Mark Gertler, 2002. "A Simple Framework for International Monetary Policy Analysis," NBER Working Papers 8870, National Bureau of Economic Research, Inc.
    2. 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.
    3. Lawrence J. Christiano & Martin Eichenbaum & Robert J. Vigfusson, 2003. "The response of hours to a technology shock: evidence based on direct measures of technology," International Finance Discussion Papers 790, Board of Governors of the Federal Reserve System (U.S.).
    4. Giannone, Domenico & Reichlin, Lucrezia, 2006. "Does Information Help Recovering Structural Shocks from Past Observations?," CEPR Discussion Papers 5725, C.E.P.R. Discussion Papers.
    5. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What Happens After a Technology Shock?," NBER Working Papers 9819, National Bureau of Economic Research, Inc.
    6. 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.
    7. 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.
    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. 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.
    10. Alho, Kari, 2002. "Catching Up and Unemployment in the EU," Discussion Papers 762, The Research Institute of the Finnish Economy.
    11. Bean, Charles R., 1994. "European unemployment: A retrospective," European Economic Review, Elsevier, vol. 38(3-4), pages 523-534, April.
    12. Daniela Sonedda, 2006. "A structural VAR approach on labour taxation policies," Applied Economics, Taylor & Francis Journals, vol. 38(1), pages 95-114.
    13. 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, 01.
    14. Kaitila, Ville, 2006. "Productivity, Hours Worked, and Tax/Benefit Systems in Europe and Beyond," Discussion Papers 1015, The Research Institute of the Finnish Economy.
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