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Tax Policy and OECD Unemployment

  • Alvin Ó Murchú

    (University College Dublin)

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    The effect of changes in payroll taxes on wages is a question of tax incidence. If workers can shift the burden of taxation onto employers, in the form of higher wages, we may expect increases in unemployment. This paper examines the extent to which workers succeed in shifting the burden of taxation onto employers and therefore the effects on unemployment of higher direct taxes. A reduced form vector autoregression model is used to estimate the effects, of a shock to direct taxes, on both wages and unemployment. The empirical estimates, estimated separately for eleven OECD countries, show workers failing to shift the burden of higher taxes and consequently insignificant changes in unemployment.

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    File URL: http://www.ucd.ie/economics/research/papers/2002/WP02.31.pdf
    File Function: First version, 2002
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    Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200231.

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    Length: 22 pages
    Date of creation: 02 Dec 2002
    Date of revision:
    Handle: RePEc:ucn:wpaper:200231
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    1. Laurence Ball & Robert Moffitt, 2001. "Productivity Growth and the Phillips Curve," Economics Working Paper Archive 450, The Johns Hopkins University,Department of Economics.
    2. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    3. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, vol. 32(2), pages 573-619, June.
    4. Bean, C R & Layard, P R G & Nickell, S J, 1986. "The Rise in Unemployment: A Multi-country Study," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages S1-22, Supplemen.
    5. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, vol. 52(1), pages 1-29, August.
    6. Olivier Blanchard & Lawrence F. Katz, 1996. "What We Know and Do Not Know About the Natural Rate of Unemployment," NBER Working Papers 5822, National Bureau of Economic Research, Inc.
    7. Alesina, Alberto & Perotti, Roberto, 1995. "Taxation and redistribution in an open economy," European Economic Review, Elsevier, vol. 39(5), pages 961-979, May.
    8. Vincent Hogan, 2001. "Do Taxes cause Unemployment?," Working Papers 200101, School Of Economics, University College Dublin.
    9. Layard, Richard & Nickell, Stephen, 1986. "Unemployment in Britain," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages S121-69, Supplemen.
    10. Knoester, Anthonie & van der Windt, Nico, 1987. "Real Wages and Taxation in Ten OECD Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 49(1), pages 151-69, February.
    11. Kay, John A, 1990. "Tax Policy: A Survey," Economic Journal, Royal Economic Society, vol. 100(399), pages 18-75, March.
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