Lower Tax Progression, Longer Hours and Higher Wages

Claus Thustrup Hansen
Authors registered in the RePEc Author Service: Claus Thustrup Kreiner

Scandinavian Journal of Economics, 1999, vol. 101, issue 1, 49-65

Abstract: The impact of tax reforms that decrease income tax progression is analysed in an equilibrium search model with wage bargaining and endogenous individual working hours. Working hours are either bargained together with the hourly wage (case 1) or determined solely by workers after bargaining over the wage (case 2). In both cases reducing tax progression increases working hours of employed and, more interestingly, unambiguously increases wages and unemployment. Wages and unemployment rise more and working hours and production less in case 1 compared to case 2, probably making case 2 countries best suited for such tax reforms. JEL Classification: H24; J22; J41

Date: 1999
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