TAXATION AND CENTRALISED WAGE SETTING: THE CASE OF ENDOGENOUS LABOUR SUPPLY
Juha Kilponen () and
Scottish Journal of Political Economy, 2005, vol. 52, issue 4, 587-606
The implications of centralised wage setting for the relationship between taxation, wages and employment are studied allowing for endogenous adjustment in work hours. We show that centralisation promotes wage moderation, makes wages and employment less sensitive to changes in wage taxation and reduces the hours worked. With an individual supply of working hours, a wage tax can even improve employment if wage setting is centralised and marginal utility from a public good is sufficiently high. Moreover, if a profit tax is used to finance public expenditure, higher tax reduces wages and improves employment.
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