The Effects of Labour Tax Progression under Nash Wage Bargaining and Flexible Outsourcing

Erkki Koskela

No 3501, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper studies in the presence of flexible outsourcing the effects of outsourcing costs, productivity of outsourcing, wage tax and tax exemption in an imperfectly competitive labour markets when labour unions and firms negotiate wages and the impacts of labour tax progression on domestic wage setting and employment. The wage elasticity of domestic labour demand is higher than in the case of strategic outsourcing and a decreasing function of the outsourcing cost, an increasing function both of the productivity of outsourcing and of the wage rate. With sufficiently strong (weak) labour market imperfections a lower outsourcing cost has a wage-moderating (wage-increasing) effect. Finally, increasing the degree of tax progression, to keep the relative tax burden per worker constant, has a wage-moderating effect and a positive effect on domestic employment and a negative effect on outsourcing.

Keywords: outsourcing; wage negotiation; labour tax progression; employment (search for similar items in EconPapers)
JEL-codes: H22 J41 J51 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2008-05
New Economics Papers: this item is included in nep-lab
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Citations: View citations in EconPapers (6)

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