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Tax progression under collective wage bargaining and individual effort determination
[Die Wirkung progressiver Besteuerung bei kollektiven Lohnverhandlungen und unbeobachtbarem individuellen Arbeitseinsatz]

Author

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  • Koskela, Erkki
  • Schöb, Ronnie

Abstract

In this paper, we study the impact of tax policy on wage negotiations, workers’ effort, and employment when effort is only imperfectly observable. We show that the different wage-setting motives – rent sharing and effort incentives – reinforce the effects of partial tax policy measures but not necessarily those of more fundamental tax reforms. We show that a higher degree of tax progression always leads to wage moderation, but the well-established result from the wage bargaining literature that a revenue-neutral increase in the degree of tax progression is good for employment does not carry over to the case with wage negotiations and imperfectly observable effort. While it remains true that introducing tax progression increases employment, we cannot rule out negative employment effects from an increase in tax progression when tax progression is already very high.

Suggested Citation

  • Koskela, Erkki & Schöb, Ronnie, 2006. "Tax progression under collective wage bargaining and individual effort determination
    [Die Wirkung progressiver Besteuerung bei kollektiven Lohnverhandlungen und unbeobachtbarem individuellen Arbeit
    ," Discussion Papers, Research Unit: Market Processes and Governance SP II 2006-13, Social Science Research Center Berlin (WZB).
  • Handle: RePEc:zbw:wzbmpg:spii200613
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    References listed on IDEAS

    as
    1. Koskela, Erkki & Schob, Ronnie, 2002. " Optimal Factor Income Taxation in the Presence of Unemployment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(3), pages 387-404.
    2. Benjamin Bental & Dominique Demougin, 2006. "Institutions, Bargaining Power and Labor Shares," SFB 649 Discussion Papers SFB649DP2006-009, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    3. Sanfey, Peter J., 1993. "On the interaction between efficiency wages and union-firm bargaining models," Economics Letters, Elsevier, vol. 41(3), pages 319-324.
    4. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82.
    5. Michael Hoel, 1990. "Efficiency wages and income taxes," Journal of Economics, Springer, vol. 51(1), pages 89-99, February.
    6. Bulkley, George & Myles, Gareth D, 1996. "Trade Unions, Efficiency Wages, and Shirking," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 75-88, January.
    7. Garino, Gaia & Martin, Christopher, 2000. "Efficiency wages and union-firm bargaining," Economics Letters, Elsevier, vol. 69(2), pages 181-185, November.
    8. Diamond, Peter A & Yaari, Menahem, 1972. "Implications of the Theory of Rationing for Consumer Choice Under Uncertainty," American Economic Review, American Economic Association, vol. 62(3), pages 333-343, June.
    9. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    10. Lindbeck, Assar & Snower, Dennis J., 1991. "Interactions between the efficiency wage and insider-outsider theories," Economics Letters, Elsevier, vol. 37(2), pages 193-196, October.
    11. José Ramón García & José Vicente Ríos, 2004. "Effects Of Tax Reforms In A Shirking Model With Union Bargaining," Working Papers. Serie AD 2004-42, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    12. Goerke, Laszlo, 1999. "Efficiency Wages and Taxes," Australian Economic Papers, Wiley Blackwell, vol. 38(2), pages 131-142, June.
    13. Koskela, Erkki & Schob, Ronnie, 1999. "Does the composition of wage and payroll taxes matter under Nash bargaining?," Economics Letters, Elsevier, vol. 64(3), pages 343-349, September.
    14. Bulkley, George & Myles, Gareth D., 1997. "Bargaining over effort," European Journal of Political Economy, Elsevier, vol. 13(2), pages 375-384, May.
    15. Koskela, Erkki & Vilmunen, Jouko, 1996. "Tax progression is good for employment in popular models of trade union behaviour," Labour Economics, Elsevier, vol. 3(1), pages 65-80, August.
    16. Andersen, Torben M. & Sandemann Rasmussen, Bo, 1999. "Effort, taxation and unemployment1," Economics Letters, Elsevier, vol. 62(1), pages 97-103, January.
    17. Altenburg, Lutz & Straub, Martin, 1998. "Efficiency Wages, Trade Unions, and Employment," Oxford Economic Papers, Oxford University Press, vol. 50(4), pages 726-746, October.
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    Cited by:

    1. Boeters, Stefan, 2011. "Optimal tax progressivity in unionised labour markets: What are the driving forces?," Economic Modelling, Elsevier, vol. 28(5), pages 2282-2295, September.
    2. repec:dau:papers:123456789/6913 is not listed on IDEAS

    More about this item

    Keywords

    Wage bargaining; effort determination; tax progression;

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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