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Does Centralised Wage Setting Lead into Higher Taxation?

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  • Pekka Sinko

    (Prime Minister's Office, Economic Council)

Abstract

This paper studies implications of centralised wage setting for the level of taxation and public expenditures in an analytical model with unionised labour markets. We extend the previous studies by allowing both demand and supply effects of labour. Also, in addition to the standard social planner approach, we consider a political economy set up, where the tax rate is chosen to maximise welfare of a median voter. Our results suggest that when working hours are endogenous, the relationship between the degree of centralisation and the labour tax rate is ambiguous. In particular, if the marginal utility from public provision is sufficiently low, centralised wage setting implies lower optimal tax rate on labour. This is due to a 'budgetary discipline effect', which reduces the optimal tax rate preferred by the median voter under centralised wage setting.

Suggested Citation

  • Pekka Sinko, 2005. "Does Centralised Wage Setting Lead into Higher Taxation?," Labor and Demography 0509007, EconWPA.
  • Handle: RePEc:wpa:wuwpla:0509007 Note: Type of Document - pdf
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    File URL: http://econwpa.repec.org/eps/lab/papers/0509/0509007.pdf
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    References listed on IDEAS

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    1. Kiander, Jaakko & Kilponen Juha, Vilmunen Jouko, 2000. "Taxes, Growth and Unemployment in the OECD Countries - Does Collective Bargaininig Matter?," Discussion Papers 235, Government Institute for Economic Research Finland (VATT).
    2. Daniele Checchi & Claudio Lucifora, 2002. "Unions and labour market institutions in Europe," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 361-408, October.
    3. Sinko, Pekka & Kilponen Juha, 2001. "Labour Taxation and the Degree of Centralisation in a Trade Union Model with Endogenous Labour Supply," Discussion Papers 250, Government Institute for Economic Research Finland (VATT).
    4. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 47-104, April.
    5. Driffill, John & van der Ploeg, Frederick, 1993. "Monopoly Unions and the Liberalisation of International Trade," Economic Journal, Royal Economic Society, vol. 103(417), pages 379-385, March.
    6. Kiander, Jaakko & Holm Pasi, Koskela Erkki, 1995. "Unions, Labour supply and Structure of Taxation: Equal Tax Bases," Discussion Papers 110, Government Institute for Economic Research Finland (VATT).
    7. Koskela, Erkki & Schob, Ronnie, 1999. "Alleviating unemployment:: The case for green tax reforms," European Economic Review, Elsevier, vol. 43(9), pages 1723-1746, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Taxation; wage setting; public expenditure;

    JEL classification:

    • J - Labor and Demographic Economics

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