The Tax System Incidence on Unemployment: A Country-Specific Analysis for the OECD Economies

Jose Garcia and Hector Sala

No 2226, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper provides a detailed analysis on the incidence of the tax structure on the labor market. To do so it goes beyond the traditional examination of the ‘level’ effect of the fiscal wedge and considers a ‘composition’ effect defined as a payroll tax bias (PTB): the proportion of payroll taxes paid by employees with respect to the one paid by firms. We develop a right-to-manage model encompassing different wage bargaining systems and the incidence of different type of taxes. Controlling for demand-side and supply-side determinants of unemployment, we show that the PTB plays a significant role in explaining unemployment in the continental European countries, but not in the Nordic nor the Anglo-Saxon ones. We also show that there is no relationship between the incidence of the PTB and unemployment persistence, even though there is a positive one with respect to the level of the fiscal wedge.

Keywords: unemployment persistence; fiscal wedge; payroll tax bias; unemployment (search for similar items in EconPapers)
JEL-codes: E24 E62 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2006-07
New Economics Papers: this item is included in nep-eec, nep-lab, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published - published in: Economic Modelling, 2008, 25 (6), 1232-1245

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Journal Article: The tax system incidence on unemployment: A country-specific analysis for the OECD economies (2008)
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