Public Goods, Unemployment and Policy Coordination

Thomas Aronsson () and Sven Wehke
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Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

No 700, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: Earlier literature on tax competition and policy coordination typically assumes that the labor market is competitive; a description less suitable for Europe, where trade unions have had a strong position in the labor market for a long time. This paper concerns factor income taxation and public good provision in small open economies characterized by capital mobility and imperfect competition in the labor market. We assume that each national government collects public revenues via taxes on labor, capital and profit income, and that the revenues are spent on a public consumption good and a public input good, where the latter enters the economic system in terms of an `externality production factor'. The overall purposes are to characterize the tax and expenditure policies, if decided upon at the national level, and analyze the welfare effects of policy coordination with respect to taxes and public expenditures. Among the results, we show that tax coordination contributes to higher welfare if it reduces the net interest rate and the wage rate, and that the relative overprovision of the public input good derived by Keen and Marchand (1997) in the context of a competitive economy may no longer hold, if the labor market is non-competitive.

Keywords: optimal taxation; wage bargaining; public goods; policy coordination (search for similar items in EconPapers)
JEL-codes: H21 H41 J51 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2006-11-24
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Public goods, unemployment and policy coordination (2008)
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