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Who is afraid of capital mobility? On labor taxation and the level of public services in an open economy

Author

Listed:
  • Lorz, Jens Oliver
  • Stähler, Frank

Abstract

This paper deals with the impact of international capital mobility on labor taxes and the size of the public sector. It employs a model of the labor market, where national trade unions arc able to set wages above the competitive level. In a closed economy, a higher labor tax raises wage demands of the unions and thus increases the distortion on the labor market. With perfect international capital mobility, competition between trade unions leads to full employment, irrespective of the labor tax rale. The distorting effect of the labor tax vanishes and governments arc able to increase the supplied quantity of public services to the first best level.

Suggested Citation

  • Lorz, Jens Oliver & Stähler, Frank, 1997. "Who is afraid of capital mobility? On labor taxation and the level of public services in an open economy," Kiel Working Papers 824, Kiel Institute for the World Economy (IfW Kiel).
  • Handle: RePEc:zbw:ifwkwp:824
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    Cited by:

    1. Siebert, Horst, 2000. "The paradigm of locational competition," Kiel Discussion Papers 367, Kiel Institute for the World Economy (IfW Kiel).

    More about this item

    Keywords

    Capital Mobility; Labor Taxation;

    JEL classification:

    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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