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Does Centralised Wage Setting Lead into Higher Taxation?

Pekka Sinko and Juha Kilponen ()

No 314, Discussion Papers from VATT Institute for Economic Research

Abstract: This paper studies implications of centralised wage setting for the level of taxation and public expenditure in an analytical model with unionised labour markets. We extend the previous studies by allowing for both demand and supply effects of labour. Also, in addition to the standard social planner approach, we consider a political economy set up, where the tax rate is chosen to maximise the welfare of a median voter. Our results suggest that when working hours are endogenous, the relationship between the degree of centralisation and the labour tax rate is ambiguous. In particular, if the marginal utility from public provision is sufficiently low, centralised wage setting implies lower optimal tax rate on labour. This is due to a "budgetary discipline effect", which reduces the optimal tax rate preferred by the median voter under centralised wage setting.

Keywords: Taxation, wage setting, public expenditure., Macroeconomic policy, Talouspolitiikka, Labour market, Työmarkkinat, Taxation, Verotus, Taxation and Social Transfers, Julkisen talouden rahoitus ja tulonsiirrot, D240 - Production; Capital and Total Factor Productivity; Capacity, E240 - Macroeconomics: Employment; Unemployment; Wages; wage indexation, E620 - Macroeconomic Aspects of Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation, H200 - Taxation, Subsidies, and Revenue: General, J310 - Wage Level and Structure; Wage Differentials by Skill, Training, Occupation, etc. (industry, schooling, experience, tenure, cohort, etc.), (search for similar items in EconPapers)
Date: 2003
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