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Labour Taxation and the Degree of Centralisation in a Trade Union Model with Endogenous Labour Supply

Pekka Sinko and Juha Kilponen ()

No 250, Discussion Papers from VATT Institute for Economic Research

Abstract: This paper considers the effect of labour taxation on wages and employment in a trade union model with endogenous working hours. In the model, individuals choose working hours with a given wage rate, competitive firms decide on employment taking wages and working hours as given and a monopoly union sets wages allowing for the response of both workers and firms. Heads and hours are assumed to be perfect substitutes in production. The government collects taxes on wages and uses the revenue to finance unemployment benefits and public good. Having derived the results of the conventional decentralised union model we show that when the centralised union perceives the link between taxes paid and public good provided, it will lead to wage moderation and higher employment. Also, wages and employment are shown to be less sensitive to increases in the wage taxation in the centralised union case. In the extreme, if individual worker's marginal utility from public good is sufficiently high, a tax increase can even improve employment. This somewhat surprising result arises because labour supply effect dominates the wage effect on labour demand.

Keywords: Union models, Labour taxation, Degree of centralisation, Working hours, Macroeconomic policy, Talouspolitiikka, Labour market, Työmarkkinat, Taxation, Verotus, Taxation and Social Transfers, Julkisen talouden rahoitus ja tulonsiirrot, D210 - Firm Behavior, E620 - Macroeconomic Aspects of Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation, H600 - National Budget, Deficit, and Debt: General, J220 - Time Allocation and Labor Supply (hours of work, part-time employment, temporary workers, work sharing, absenteeism, quits, work-life balance), J500 - Labor-Management Relations, Trade Unions, and Collective Bargaining: General, (search for similar items in EconPapers)
Date: 2001
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