 The Impact of Taxes on Employment and Economic Growth in Industrialized CountriesMPRA Paper from University Library of Munich, Germany Abstract: Looking at economic trends in industrialized countries during the time frame 1965 to 1995, there has been an upward trend in unemployment, which appears to be related to the slowdown of economic growth. However, the relation between unemployment and a slowing growth pattern stems from an external variable: a rapid increase in the cost of labor. There are many factors behind the rise of labor costs, but the most significant reason is from higher taxes being placed on labor. Increasing labor taxes have two primary effects on employment and growth. First, the demand for labor is decreased as the cost rises, therefore creating unemployment. Second, because the cost of labor rises, firms will begin replacing labor with capital until the marginal product of capital falls, diminishing the incentive for investment and growth. The empirical evidence found in this paper proves this theory is accurate as a 10 percentage point increase in the tax rate on labor increase the unemployment rate by 5.3 percentage points and decreases growth by 2.1 percentage points. Keywords: Taxes; Economic Growth; Employment (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:16574 Access Statistics for this paper More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.