Labour Taxation in a Unionised Economy with Home Production

The impact of payroll taxes on unemployment and welfare are examined in a model with household production and union–firm wage bargaining. The analysis shows that unemployment typically falls as the payroll tax rate in the market sector for household substitutes (the service sector) is reduced. This holds even when the payroll tax rate in the non-service sector is raised in order to maintain a balanced government budget. Welfare improves with a reduced-service-sector payroll tax rate only if unions are equally strong and firms are equally labour intensive across the sectors.
JEL classification : E 24; H 21; J 22; J 51     

Employment Protection and Unemployment Benefits: On Technology Adoption and Job Creation in a Matching Model

We analyse the effects of different labour‐market policies (employment protection, unemployment benefits, and payroll taxes) on job creation and technology choices in a model where firms are matched with workers of different productivity and wages are determined by ex post bargaining. The model is characterized by two intertwined sources of inefficiency, namely a matching externality and a hold‐up externality associated with the bargaining strength of workers. The results depend on the relative importance of the two externalities and on worker risk aversion. “Flexicurity”, meaning low employment protection and generous unemployment insurance, can be optimal if workers are sufficiently risk‐averse and the hold‐up problem is relatively important.     

Labour market outliers: Lessons from Portugal and Spain

Spain has the highest unemployment rate (22.2%) of any European Union country, Portugal one of the lowest (7.3%). Superficially, these countries share many labour market features: the toughest job security rules in the OECD, an apparently similar architecture of wage bargaining, and comparable generosity of their unemployment insurance systems, at least since 1989. We address the puzzle by examining Portuguese and Spanish labour market institutions, in particular job security, unemployment benefits and the system of wage bargaining. We then conduct empirical analysis of Spanish and Portuguese unemployment outflows and wage distributions, using micro data. We find differences in unemployment benefits (non-existent in Portugal until 1985, and less generous nowadays), differences in wage flexibility (wage floors by category established by collective agreements are set at a lower relative level in Portugal), and, in practice, higher firing costs in Spain. A key explanation of the difference in Portuguese and Spanish unemployment rates is the wage adjustment process. Generous benefit levels may have been necessary for the path Spanish unions took, but this was not the sole explanation of different wage setting in Spain and Portugal.     

Search,shirking and labor market volatility

This paper proposes a modified version of the standard search and matching model of the labour market that includes a shirking mechanism. We show that our model delivers a close match to the simulated volatilities, correlations and autocorrelations of unemployment, vacancies, labour market tightness and the job finding rate with values observed in US data. In doing so, it outperforms prominent alternative models. Our model also has novel policy implications for the impact of income taxes, subsidies on hiring and employment taxes on unemployment and its volatility.     

Optimum income taxation and layoff taxes

This paper analyzes optimum income taxation in a model with endogenous job destruction that gives rise to unemployment. It is shown that optimal tax schemes comprise both payroll and layoff taxes when the state provides public unemployment insurance and aims at redistributing income. The optimal layoff tax is equal to the social cost of job destruction, which amounts to the sum of unemployment benefits (that the state pays to unemployed workers) and payroll taxes (that the state does not get when workers are unemployed).     

The “greening” of trade unions and the demand for eco-taxes

By embedding labour market bargaining considerations in an influence-seeking framework, we show how a union's stance on environmental policy depends on the exposure of their members to the risk of job loss. With a risk of unemployment, unions lobby with employers to resist stricter environmental policies. When employment is secure, unions may support policies that reduce employment opportunities for nonunion workers. “Environmentalism” can therefore arise without explicit environmental concerns among workers. Consequently, pollution taxes may yield a negative welfare dividend in the form of inefficiently high unemployment.     

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.     

Labour Market Policies and Long-term Unemployment in a Flow Model of the Australian Labour Market

This paper develops a general equilibrium job matching model, which is used to assess the impact of active labour market policies, reductions in unemployment benefits and reductions in worker bargaining power on long-term unemployment and other key macro variables. The model is calibrated using Australian data. Simulation experiments are conducted through impulse response analysis. The simulations suggest that active labour market programs (ALMPs) targeted at the long-term unemployed have a small net impact and produce adverse spillover effects on short-term unemployment. Reducing the level of unemployment benefits relative to wages and worker bargaining power have more substantial effects on total and long-term unemployment and none of the spillover effects of ALMPs.     

Ageing shocks and short-run regional labour market dynamics in a spatial panel VAR approach

Using a flexible spatial panel VAR model for a small-scale labour market system, we investigate the dynamic interdependences between changes in the demographic structure and the labour market performance of a regional economy. With a particular focus on ageing shocks, we describe an increase in the share of elderly in regional population due to exogenous changes in the institutional context, such as pension reforms. The regional labour market implications of an ageing shock are then tested with regard to the effects on employment growth, unemployment and labour participation rate. Our results based on a sample of 71 Scandinavian regions point to negative regional labour market effects of an ageing shock implying a reduction in employment growth and a temporarily declining labour participation rate, while the unemployment rate increases. Importantly, spatial spillovers amplify these negative impacts through a marginalization of macro-regional labour markets. As a robustness check, we reverse the causal ordering and analyze the responses to a positive macroeconomic shock which initially increases employment growth. We find direct and spatially indirect adjustment patterns characterized by a reduction of the unemployment rate, an increase in the labour participation rate and a decrease in the share of elderly in the population.     

TAXES ON PAYROLL, REVENUES AND PROFITS IN THREE MODELS OF COLLECTIVE BARGAINING

Variations in company taxes are analysed for a right-to-manage model, an efficient bargaining setting and a seniority approach. Taxes cannot be shifted forward by the risk-neutral firm. Alternative income and bargaining power are allowed to vary with taxes. Employing asymmetric Nash solution it is found that changes in a payroll, revenue or profit tax can have differing implications for labour demand curve models and efficient bargaining solutions. This distinction might provide a novel basis for empirical work. Variations in bargaining power and-within a labour demand curve setting-the union's objective function do not change results.     

Technology–Policy Interaction in Frictional Labour-Markets

Does capital-embodied technological change play an important role in shaping labour-market outcomes? To address this question, we develop a model with vintage capital and search-matching frictions where irreversible investment in new vintages of capital creates heterogeneity in productivity among firms, matched as well as vacant. We demonstrate that capital-embodied technological change reduces labour demand and raises equilibrium unemployment and unemployment durations. In addition, the presence of labour-market regulations (unemployment benefits, payroll taxes, and firing costs) exacerbates these effects. Thus, the model is qualitatively consistent with some key features of the European labour-market experience relative to that of the U.S.: it features a sharper rise in unemployment and a sharper fall in the vacancy rate and the labour share. A calibrated version of our model suggests that this technology–policy interaction could explain a sizeable fraction of the observed differences between the U.S. and Europe.     

Macroeconomic Performance and Wage Bargaining in a Monetary Union

Building on a micro-founded model of a two-region monetary union, this paperanalyses the macroeconomic impact of institutional reforms in labour marketsand central banking that may occur as a result of monetary unification. Thepaper shows that monopoly distortions in the labour market are a key factorin evaluating the effects of central bank's conservativeness and wagecentralisation on inflation and unemployment. Wage restraint is favoured ina highly decentralised wage bargaining setup as well as under a liberalcentral bank, provided competition is high in the labour market.     

Labor taxation, public finance, and wage determination: evidence from OECD countries

This paper analyzes the relationship between unemployment, average effective labour tax rates and public spending in 17 OECD countries. The focus is on the degree of centralization and cooperation in wage setting. Estimation results from a dynamic time-series-cross-section model suggest that the countries where wage setting takes place at the firm level have used labour taxes less extensively in financing welfare spending, compared to countries with centralized or decentralized bargaining. This is consistent with another finding, according to which labour taxes distort the labour demand the least in the countries with firm level bargaining.     

Beyond Eurosclerosis

Europe no longer suffers from Eurosclerosis; unemployment, notably long-term unemployment, had decreased substantially for more than a decade. Mobility across labour market states increased in those countries where unemployment has been falling the most. Institutional reforms -- such as declining employment protection for new entrants in the labour market and less generous unemployment benefits -- account for this increase in mobility. Focusing on these reforms, we rationalize why EU workers, including those with permanent contracts, are increasingly unhappy about labour market conditions in spite of the disappearance of mass unemployment in Europe. Due to these perceptions, policy reversals cannot be ruled out. Governments wishing to minimize the risk of going back to Eurosclerosis should move towards flexicurity configurations, compensating workers for higher risks of job loss, and introduce tenure tracks to the labour market, preventing the development of dual labour market structures. This would avoid dissipating the employment gains of the last decade during this recession.
--- Tito Boeri and Pietro Garibaldi     

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.     

Coordination versus flexibility in wage formation: a focus on the nominal wage impact of productivity in Germany,Greece, Ireland,Portugal, Spain and the United States

Wage coordination between countries of the European Monetary Union (EMU) aims at aligning nominal wage growth with labour productivity growth at the national level. We analyse the developments in Germany, the EMU’s periphery countries Greece, Ireland, Portugal and Spain along with the United States over the period 1980 to 2010. Apart from the contribution of productivity to nominal wages, we take into account the contributions of prices, unemployment, replacement rates and taxes by means of an econometrically estimated nonlinear equation resulting from a wage bargaining model. We further study the downward rigidities of nominal wages. The findings show that in past times of low productivity, price inflation and reductions in unemployment still put significant upward pressure on nominal wage growth. The periphery countries are far from aligning nominal wage growth with productivity growth. German productivity is a major wage determinant, but surely not the only one. Within the context of a free bargaining process between employers and labour unions, policy-makers can effectively use the replacement rate to steer the nominal wages outcome.     

Labor market reforms, job instability, and the flexibility of the employment relationship

We endogenize separation in a search model of the labor market and allow for bargaining over the continuation of employment relationships following productivity shocks to take place under asymmetric information. In such a setting separation may occur even if continuation of the employment relationship is privately efficient for workers and firms. We show that reductions in the cost of separation, owing for example to a reduction in firing taxes, lead to an increase in job instability and, when separation costs are initially high, may be welfare decreasing for workers and firms. We furthermore show that, in response to an exogenous reduction in firing taxes, workers and firms may switch from rigid to flexible employment contracts, which further amplifies the increase in job instability caused by policy reform.     

A discriminant analysis of factors affecting the employment of urban youth

While the issue of youth unemployment has received a great deal of attention by policy makers, there has been little empirical research on factors which affect the demand for young workers at the micro level of actual labour market settings. This paper offers some evidence on entry level wages, unskilled job characteristics, and recruitment practices as factors affecting the employment of urban youth. A bivariate discriminant analysis is applied to survey data on employers located in five, centralized urban labour markets and shown that firm size, turnover, number of unskilled job slots, school referrals and employee–friend referrals are significant, differentiating factors between firms who have young workers on their payroll and firms who do not employ youth. These differentiating factors are related to the structure of youth labour markets.     

Flat income taxation,redistribution and labour market performance

A flat tax rate on labour income has gained popularity in European countries. This article assesses the attractiveness of such a flat tax in achieving redistributive objectives with the smallest distortions to employment. We do so by using a detailed applied general equilibrium model for the Netherlands. The model is empirically grounded in the data and encompasses decisions on hours worked, labour force participation, skill formation, wage bargaining between unions and firms and a wide variety of institutional details. The simulations suggest that the replacement of the current tax system in the Netherlands by a flat rate will harm labour market performance if aggregate income inequality is contained. Only flat tax reforms that reduce redistribution will raise employment. This finding bolsters the notions from optimal tax literature regarding the equity-efficiency trade off and the superiority of nonlinear taxes to obtain redistributive goals in an efficient way.     

Green Tax Reform and Competitiveness

This paper studies a revenue-neutral green tax reform that substitutes energy for wage taxes in an open economy with unemployment. As long as the labour tax rate exceeds the energy tax rate, such a reform will increase employment, reduce the domestic firms' unit cost of production and hence increase international competitiveness and output of the economy. The driving force behind these results is the technological substitution process that a green tax reform will bring about. The resulting reduction in unemployment is welfare increasing since energy, which the country has to buy at its true national opportunity cost, is replaced with labour, whose price is above its social opportunity cost.