On Tax Over-Shifting in Wage Bargaining Models

Edward Calthrop and Bruno De Borger

Atlantic Economic Journal, 2007, vol. 35, issue 2, 127-143

Abstract: It has frequently been noted in the wage bargaining literature that increasing average labour taxes may in fact be over-shifted in the pre-tax wage that is negotiated between unions and firms, raising workers post-tax wages. In this paper, we study the precise conditions for such tax over-shifting to occur under both Nash and Right-To-Manage bargaining structures, and considering both competitive and imperfectly competitive output market conditions. In the case of competitive output markets, we derive and interpret the conditions for over-shifting to occur and show that they hold for an entire class of commonly used production functions. Moreover, under monopolistically competitive output markets we show that tax over-shifting will occur when the firm has sufficient market power. The conditions on the production function, that were necessary and sufficient for tax over-shifting to occur under perfect competition, are shown to be no longer necessary. These findings hold for all bargaining structures considered. Copyright International Atlantic Economic Society 2007

Keywords: Bargaining models; Tax over-shifting; H20; J51 (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1007/s11293-007-9063-0

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