Labour Taxation, Tax Progression and Job Matching - Comparative Alternative Models of Wage Setting

Pekka Sinko

No 285, Discussion Papers from VATT Institute for Economic Research

Abstract: In this paper we consider the effects of labour taxation on wages, unemployment and efficiency in a job matching framework. We derive labour market equilibrium with taxes in a model of endogenous job creation and job destruction under three alternative hypothesis of wage formation: Nash bargain, monopoly union and efficiency wages. We find that labour taxes harm employment irrespective of the wage formation mechanism. However, employment turns out to be much less sensitive to taxation in the models involving wage bargaining. Our results also suggest that increased progression in labour taxation may improve employment with low or even non-existent efficiency cost if wages are set in a bargaining framework.

Keywords: Labour taxation, wage setting, job matching, Labour market, Työmarkkinat, Taxation, Verotus, Taxation and Social Transfers, Julkisen talouden rahoitus ja tulonsiirrot, C000 - Mathematical and Quantitative Methods: General, H200 - Taxation, Subsidies, and Revenue: General, J310 - Wage Level and Structure; Wage Differentials by Skill, Training, Occupation, etc. (industry, schooling, experience, tenure, cohort, etc.), J410 - Contracts: Specific Human Capital, Matching Models, Efficiency Wage Models, and Internal Labor Markets (other contracts), (search for similar items in EconPapers)
Date: 2002
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