Payroll Taxation, Unemployment and Skill Formation

Pål Bergström

No 1997:16, Working Paper Series from Uppsala University, Department of Economics

Abstract: The issue of lowering or restructuring payroll taxes in order to relieve the situation for the unemployed, and in particular unskilled workers, is a topical question on the political agenda across the European countries. This paper examines the potential effects of altered payroll taxes on unemployment by using a general equilibrium model with wage bargaining and two groups of labour: skilled and unskilled. The results within the framework of the paper are not very encouraging, though. Differentiated or generally lowered payroll taxes cannot be expected to provide relief for the unemployed unskilled, or to have any major impact on overall unemployment. However, increasing the progressiveness of the payroll tax could induce positive effects through wage moderation. This policy is however likely to have adverse effects on skill formation, a problem which is addressed by modelling individuals' choices of education explicitly.

Keywords: Progressive taxes; skill formation; union bargaining (search for similar items in EconPapers)
JEL-codes: H22 J24 J51 (search for similar items in EconPapers)
Pages: 31 pages
Date: 1997-07-15
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:uunewp:1997_016

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