The Effects of Tax Wedges on Hours Worked and Unemployment in Sweden

Alun Thomas

No 1998/152, IMF Working Papers from International Monetary Fund

Abstract: The paper investigates the relationship between labor taxation and unemployment in Sweden by estimating a labor market model that includes a wage-setting locus and labor demand and supply relationships. The study simulates the effect of a 1 percentage point increase in the payroll tax and in total tax rates. The increase in the payroll tax pushes up labor costs by about ½ percent over a 5–10 year time horizon. Hours worked fall by 0.5 percent and the unemployment rate rises by 0.3 percentage point. The increase in total tax rates generates a similar result. Therefore, it appears that increases in taxes have adversely affected employment and unemployment in Sweden.

Keywords: WP; wage; real wage; reservation wage; payroll taxes; total labor taxes; labor cost; employment; unemployment; employee wage; wage cost; salary cost; net wage; wage sector; wage cut; Payroll tax; Real wages; Labor markets; Wages; Labor taxes (search for similar items in EconPapers)
Pages: 25
Date: 1998-10-01
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Citations: View citations in EconPapers (3)

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