Labour Taxes, Market Size and Productivity Growth

Domenico Ferraro, Soroush Ghazi and Pietro Peretto

The Economic Journal, 2023, vol. 133, issue 654, 2210-2250

Abstract: How do changes in labour taxes affect innovation and aggregate productivity growth? To answer this question, we propose a quantitative, general equilibrium growth model featuring product and quality innovation with endogenous market structure, estimate its parameters and provide empirical validation for the propagation mechanism of labour tax changes. We find that a temporary cut in flat-rate labour taxes produces a growth acceleration in aggregate productivity, permanently increasing the path of real GDP per capita. Moreover, such permanent gains are sizeable even without long-run growth effects.

Keywords: Labor taxation; Economic growth; Total factor productivity; Firms’ entry; Market structure; Innovation (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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