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Do labour taxes (and their composition) affect wages in the short and in the long run?


  • Alfonso Arpaia

    (ECFIN, European Commission)

  • Giuseppe Carone

    (ECFIN, European Commission)


Measures aimed at reducing the tax burden on labour have been advocated to alleviate the EU unemployment problem. Most of the analyses document a relationship between the unemployment rate and the tax burden on labour. Hence, it is not possible to discern whether the effect on unemployment derives from labour demand, labour supply or through the wage formation mechanism. Moreover, the empirical analyses are usually static, and may be indicative of the steady-state determinants of the unemployment rate and do not reveal the features of the adjustment process. This paper studies the relationship between labour taxes and labour costs by modelling the wage formation mechanism in a dynamic context. We test if the composition of labour taxes affects labour costs in the short- and in the long-run and whether highly centralised bargaining systems have better employment performance than decentralised ones. We apply static and dynamic panel data techniques to a panel of EU countries. Our findings suggest that there is probably some wage resistance in the short-term but not in the long-term, although the transition to the long-term can be very long and therefore the short- term impact and the dynamics of adjustment can be long-lasting.

Suggested Citation

  • Alfonso Arpaia & Giuseppe Carone, 2004. "Do labour taxes (and their composition) affect wages in the short and in the long run?," Public Economics 0411004, EconWPA.
  • Handle: RePEc:wpa:wuwppe:0411004
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    Cited by:

    1. European Commission, 2010. "Taxation trends in the European Union: 2010 edition," Taxation trends 2010, Directorate General Taxation and Customs Union, European Commission.
    2. Peter Egger & Doina Radulescu & Nora Strecker, 2013. "Effective labor taxation and the international location of headquarters," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(4), pages 631-652, August.
    3. Coenen, Günter & McAdam, Peter & Straub, Roland, 2008. "Tax reform and labour-market performance in the euro area: A simulation-based analysis using the New Area-Wide Model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2543-2583, August.
    4. Giuseppe Carone & Jan Host Schmidt & Gaetan Nicodeme, 2007. "Tax revenues in the European Union: Recent trends and challenges ahead," European Economy - Economic Papers 2008 - 2015 280, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    5. European Commission, 2011. "Tax Reforms in EU Member States 2011: tax policy challenges for economic growth and fiscal sustainability," Taxation Papers 28, Directorate General Taxation and Customs Union, European Commission.
    6. Sandrine Levasseur, 2011. "labour markets adjustments in Estonia during the global crisis," Documents de Travail de l'OFCE 2011-25, Observatoire Francais des Conjonctures Economiques (OFCE).
    7. Ángel Melguizo & José González-Páramo, 2013. "Who bears labour taxes and social contributions? A meta-analysis approach," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 4(3), pages 247-271, August.
    8. Elisabetta Croci Angelini & Francesco Farina, 2007. "Wage Inequality in Europe: the Role of Labour Market and Redistributive Institutions," AIEL Series in Labour Economics,in: Nicola Acocella & Riccardo Leoni (ed.), Social Pacts, Employment and Growth. A Reappraisal of Ezio Tarantelli’s Thought, edition 1, chapter 10, pages 195-217 AIEL - Associazione Italiana Economisti del Lavoro.
    9. Willi Leibfritz & Paul O'Brien, 2005. "The French Tax System: Main Characteristics, Recent Developments and Some Considerations for Reform," OECD Economics Department Working Papers 439, OECD Publishing.
    10. International Monetary Fund, 2008. "Greece; Selected Issues," IMF Staff Country Reports 08/147, International Monetary Fund.
    11. Jose Emilio Boscá & Rafael Domenech & Javier Ferri, 2008. "Tax Reforms and Labour-market Performance: An Evaluation for Spain using REMS," Working Papers 0804, International Economics Institute, University of Valencia.
    12. Sandrine LEVASSEUR, 2012. "Labour market adjustments in Estonia during the 2008/2011 crisis," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 3, pages 123-143, June.
    13. Tehmina S. Khan & John Norregaard, 2007. "Tax Policy; Recent Trends and Coming Challenges," IMF Working Papers 07/274, International Monetary Fund.

    More about this item


    Taxation; tax wedge; tax incidence; labour costs; wage resistance; employment; dynamic panel data; social security contributions.;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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