Working Paper Series,
Uppsala University, Department of Economics

Abstract: This paper investigates the impact of payroll taxes on unemployment and welfare in a model with household production and union firm wage bargaining. It turns out that unemployment, most likely, falls with a reduced payroll tax in the market sector producing household substitutes (service sector), although the taxation in the rest of the economy needs to be raised. From a welfare point of view, in the presence of lump-sum taxes, it is optimal to subsidise the service sector, and the subsidy should be greater the more market power the negotiating units in the service sector exert in the wage bargains. Moreover, welfare improves with a reduced service sector payroll tax that is financed with higher distortionary taxes in the rest of the economy, if the two sectors are equally labour intensive.

Keywords: Home production; optimal taxation; unemployment

JEL-codes: H21; J22; J58

31 pages, February 16, 1998

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Published as

Ann-Sofie Kolm, (2000), 'Labour Taxation in a Unionised Economy with Home Production', Scandinavian Journal of Economics, vol 102, no 4, pages 689-705

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