Taxation and Labor Markets

We exploit the common features of models such as union, search and efficiency wage models to develop a framework that can be used to analyze the effects of any revenue-neutral tax reform on employment. In particular, we show that taxes paid by workers are not equivalent to taxes paid by firms when taxes are non linear. Moreover, we show that the positive impact of tax progressivity on employment is attributable only to a limited set of hypotheses. Received May 2, 2001; revised version received November 27, 2001 Published online: December 5, 2002     

Taxation and Wage Bargaining*

The paper analyzes the effects of personal taxes on wage bargaining It concludes that an increase in tax progressivity will normally increase union wage-bargaining pressure and so raise the equilibrium wage This is the opposite result to that recently derived by Creedy and McDonald (1990).     

Efficiency Wages and Taxes

Various taxes influence wage and employment outcomes in efficiency wage models. These findings are extended by incorporating more comprehensive tax functions and additional tax parameters. Moreover, the importance of different effort functions is evaluated. It is shown that higher marginal tax rates, holding the level of taxes constant, reduce wages and increase employment. Higher levels of taxes on income, labour costs and value-added tend to raise unemployment.     

On the Equivalence of Taxes Paid by Employers and Employees

In this paper we study the employment effects of a budget neutral restructuring of taxes levied on employers and employees. We derive conditions for taxes levied on workers to have the same employment effects as taxes levied on firms under standard processes of wage determination.     

Taxes,Strikes and Wages

A union and a firm bargain about wage increases. The firm possesses private information about its revenues. A two-period screening model is used to derive equilibrium wage demands by the union and to calculate measures of strike activity. Changes in wage demands and dispute probabilities due to alterations in various taxes are analysed. A more progressive income tax, a lower level of income taxes and higher payroll taxes reduce wages and strike activity. Hence, tax policy can be used not only to affect wages and employment, but lso to influence strike incidence.     

Help the Low Skilled or Let the Hardworking Thrive? A Study of Fairness in Optimal Income Taxation

In a model where agents have unequal wages and heterogeneous preferences, we study the optimal redistribution via an income tax, when the social objective is based on a combination of efficiency and fairness principles, and when incentive issues are taken into account. We show how some fairness principles entail specific features for the optimal taxes, such as progressivity or tax exemption for incomes below the minimum wage.     

Does the Progressivity of Income Taxes Matter for Human Capital and Growth?

We develop a model with heterogeneity in skills to study the effect of tax progressivity on economic growth. The probability of becoming skilled depends positively on expenses on teacher time. We consider growth resulting from an externality due to skilled workers and from their employment in research and development. We show changes in the progressivity of taxes can have growth effects even when changes in flat rate taxes have none. The response is stronger with externality‐driven growth. Progressive taxation, often suggested to reduce inequality, can increase the long‐run skill premium and decrease the upward mobility of the poor.     

Index to Volume 52, 2000

In an efficiency wage economy with variable profits, a shift from payroll to employment taxes will reduce unemployment if the tax level is held constant at the initial wage. However, unemployment will rise if firms are constrained to zero profits in the long run and if tax revenues are constant. This reversal of employment effects occurs because the shift in taxes reduces wages. This implies a budget deficit. Hence, taxes will have to be raised if revenues are held constant. If the firm's profits cannot change, the tax increase will cause some firms to close down and unemployment will rise. Thus, the predicted employment consequences of changes in the tax structure depend on assumptions about the time horizon and budget constraint.     

Labor or consumption taxes? An application with a dynamic general equilibrium model with heterogeneous agents

This study analyzes the effects of tax reform that shifts tax burden from labor to consumption. In this context, I also deal with the issue of progressivity. Even though this kind of tax policy change has recently gained popularity, its positive effects are debatable while the offsetting effect of a consumption tax on labor supply makes the net output change rather ambiguous. I examine these effects using a dynamic general equilibrium model with heterogeneous agents. The model is calibrated to fit certain characteristics of the Finnish economy. In addition to output and employment effects, I study the tax reform's effect on income and wealth distribution. First, I find that eliminating progressivity in labor taxation increases output via increase in capital accumulation that comes, however, in expense of slightly more inequality. Then, tax reform that replaces progressive labor taxes with a flat-rate consumption tax leads to a significant rise in capital accumulation, a negligible change in labor supply and gross labor income distribution, but a relatively considerable increase in wealth concentration.     

THE EFFECTS OF TAXES ON LABOUR IN A DYNAMIC EFFICIENCY WAGE MODEL*

This paper studies the impact of wage and employment taxes in an intertemporal efficiency wage model. Cases with fixed, linear and quadratic adjustment costs associated with job creation are considered. In general, the model shows that an increase in the employment tax leads to an increase in unemployment, reducing job creation, and has ambiguous effect on wages; whereas an increase in the wage tax reduces wages and has ambiguous impact on unemployment and job creation.     

Are Progressive Income Taxes Stabilizing?

We assess the stabilizing effect of progressive income taxes in a monetary economy with constant returns to scale. It is shown that tax progressivity reduces, in parameter space, the likelihood of local indeterminacy, sunspots and cycles. However, considering plausibly low levels of tax progressivity does not ensure saddle‐point stability and preserves as robust the occurrence of sunspot equilibria and endogenous cycles. It turns out that increasing progressivity, through its impact on after‐tax income, makes labor supply more inelastic. However, even when large, tax progressivity does not neutralize the effects of expected inflation on current labor supply which may lead to expectation‐driven business fluctuations.     

促进我国就业增长的行业特征研究——来自2002-2007年投入产出表的证据

本文以三次经济普查中的行业从业人员数据为基础,用2002、2005和2007年的投入产出表分析研究我国42个行业的就业弹性、就业乘数,并分解出各因素对2002-2007年期间就业增长的贡献。结果表明:稳定就业以传统制造业和社会服务业为基础,扩大就业以高新技术制造业和新兴服务业为主;资源垄断性行业劳动成本上升较快,提高劳动收入不利于就业,而传统服务业中的低工资行业提高劳动收入不会减少就业;加快资源性垄断行业和社会性服务业的改革,加强制造业和服务业之间的产业关联,扩大居民消费,特别是扩大农村居民消费,对促进就业增长有积极作用。     

Progressive Taxation and Wage Setting: Some Evidence for Denmark

The proposition that a progressive tax system contributes to wage moderation is studied using Danish earnings data disaggregated by occupation, gender and earnings level. Our main conclusions are that income-tax progression affects wage setting, but whether it moderates or exaggerates wage pressure is income dependent. An increase in progressivity reduces the pre-tax earnings of middle-income workers (manual male workers and moderate income earners among both male and female non-manual workers). The reverse is found for high-income earners (non-manual male workers), in that an increase in progressivity tends to raise pre-tax earnings. Finally, there is no significant effect of tax progressivity on the wages of low-income earners.
JEL classification : H 3; J 3; J 5; J 6     

Single-crossing conditions in comparisons of tax progressivity

Statements to the effect that one tax is more progressive than another are frequently made, but seldom explained. Starting from a criterion of Lorenz domination, this paper shows how an intuitively appealing single-crossing condition on appropriately normalized tax schedules may be used in progressivity comparisons. This condition is closely related to, and illuminates, the necessary and sufficient condition derived by Jakobsson (1976) for the distributional implications of alternative taxes to be inferred from their schedules alone.     

Tax Reform,Structural Unemployment and the Environment

The effects of environmental tax reform, i.e., using the proceeds of a higher energy tax rate to lower the labour tax rate, on wage formation, employment and environmental quality are analysed in the context of a small open economy with structural unemployment caused by hiring costs. We find that such a reform may boost employment if it shifts the tax burden away from workers towards those without employment in the formal sector. Environmental tax reform succeeds in shifting the tax burden away from workers in the formal sector if higher energy taxes reduce earnings in the informal sector by reducing labour productivity.     

The impact of tax reforms on unemployment in a SMOPEC

This paper analyzes revenue-neutral tax reforms for a small open economy which is constrained to a balanced current account and whose producers have market power on the world market. We consider origin-based and destination-based commodity taxes as well as taxes on income, the payroll, and on an imported factor of production. Our main findings are the following. First, the strength, and for some parameter constellations, even the sign of the employment effect of tax reforms varies with the degree of openness of the economy. Second, the indeterminacy of the sign of the employment effect crucially hinges on the presence of an internationally mobile factor. The central mechanism underlying our results are adjustments of the real exchange rate which have repercussions on wage and price setting and therefore on employment.     

The importance of composition of fiscal policy: evidence from different exchange rate regimes

We study the macroeconomic effects of fiscal policies in an open economy. We emphasize two transmission mechanisms: the cost channel, by which wage government spending and labor taxes raise the real wage firms must pay, and the exchange rate channel, by which the nominal exchange rate shifts induced by fiscal policy have real effects if (some) prices and wages are sticky. The latter channel implies that changes in wage government spending or in labor taxation should have different effects under flexible than under fixed exchange rates. In a 1964–93 panel of OECD countries we find significant evidence for both channels. Moreover, we find that the real product wage and profitability are more responsive than quantities (employment and output) to fiscal policy innovations.     

Employment- and growth effects of tax reforms

Since the mid-1990s almost all OECD countries have engaged in fundamental reforms of their tax systems. There is a trend towards higher social security contributions and lower tax rates on personal and corporate income. This paper explores whether these tax policy measures are effective means for reducing unemployment and accelerating economic growth. Using a Pissarides type search model with endogenous growth, we analyze how savings and the incentive to create new jobs are affected by revenue-neutral tax swaps between wage income taxes, payroll taxes, capital income taxes and taxes levied on capital costs. In our framework, cutting the capital income tax (reducing the double taxation of dividend income) financed by a higher payroll tax turns out to be superior, such a policy mix fosters both employment and growth. Most other tax reforms imply a trade-off between employment and growth.     

Optimal tax progressivity in unionised labour markets: What are the driving forces?

In labour markets with collective wage bargaining higher progressivity of the labour income tax creates a trade-off. On the one hand, wages are lowered and unemployment decreases, on the other hand, the individual labour supply decision is distorted at the hours-of-work margin. The optimal level of tax progressivity within this trade-off is determined using a numerical general equilibrium model with imperfect competition on the goods market, collective wage bargaining and a labour-supply module calibrated to empirically plausible elasticity values. The model is calibrated to macroeconomic and institutional parameters of both the OECD average and a number of individual OECD countries. In most cases the optimal degree of tax progressivity is below the actual level. A decomposition approach shows that the optimal level is increased by high unemployment and by the general tax level.     

PROGRESSIVITY AND REDISTRIBUTION IN NON‐REVENUE NEUTRAL TAX REFORMS: THE LEVEL AND DISTANCE EFFECTS

Kakwani and Reynolds–Smolensky indices are used in the literature to measure the progressivity and redistributive capacity of taxes. These indices may, however, show some limits when used to make normative assessments about non‐revenue neutral tax reforms. Two approaches have traditionally been taken to overcome this problem. The first of these consists of comparing after‐tax income distributions through generalized Lorenz (concentration) curves. The second approach is based on the decomposition of changes in the Reynolds–Smolensky index into changes in the average tax rate and variations in progressivity. Nonetheless, this decomposition between the average tax rate and progressivity may be further exploited to obtain some information that can be relevant to assess tax reforms. The main aim of this study is to draw up some indicators that can be useful to quantify the effects of non‐revenue neutral tax reforms. These indicators are used to investigate the last personal income tax reforms that have taken place in Spain.