Research Discussion Papers, Bank of Finland
No 19/2001:
Labour taxation and employment in trade union models: A partial survey
Erkki Koskela
Abstract: This paper uses a union bargaining framework, where the
wage rate is negotiated between the representatives of employees and
employers and firms unilaterally determine employment, to discuss the
relationship between labour taxation and employment. In imperfectly
competitive labour markets higher labour taxes – income and payroll taxes –
will increase labour costs and have negative effects on employment. Tax
progression tends to moderate wages and boost employment. Moreover, if
labour tax bases are unequal due to tax exemptions, the structure of labour
taxation matters so that the tax wedge may not be a sufficient statistic to
describe the channel of influence of labour taxation. Finally,
distortionary effects of labour taxes in more corporatist economies should
be smaller than in economies with more decentralised wage bargaining.
Empirical evidence – though not always very strong – supports these
notions.
Keywords: union bargaining; labour taxation; tax progression; (follow links to similar papers)
JEL-Codes: H20; H22; J51; (follow links to similar papers)
32 pages, September 21, 2001
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