Analysis of Labor Tax Progression under Heterogeneous Domestic Labor Markets and Flexible Outsourcing

Erkki Koskela

No 5313, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: What are the impacts of labor tax reform on wage setting and employment to keep the relative tax burden per low-skilled and high-skilled workers constant in the case of heterogeneous domestic labor markets, i.e. imperfect competition in low-skilled labor and perfect competition in high-skilled labor in the presence of outsourcing? A higher degree of tax progression by raising the wage tax and the tax exemption for the low-skilled workers will decrease the wage rate and increase labor demand of low-skilled workers, whereas it will decrease (increase) employment of high-skilled workers in CES utility function when the elasticity of substitution between consumption and leisure is higher (lower) than one. A higher degree of wage tax progression for the high-skilled worker will have no effect on the high-skilled wage in the presence of CES utility function.

Keywords: heterogeneous domestic labor markets; wage bargaining; impacts of labor taxation; outsourcing (search for similar items in EconPapers)
JEL-codes: E24 H22 J21 J31 J51 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2010-11
New Economics Papers: this item is included in nep-lab, nep-mac and nep-pub
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Working Paper: Analysis of Labor Tax Progression under Heterogeneous Domestic Labor Markets and Flexible Outsourcing (2010)
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