Labour Taxation and Employment: An Analysis with a Macroeconomic Model for the Finnish Economy

Markku Lehmus

No 249, Working Papers from Työn ja talouden tutkimus LABORE, The Labour Institute for Economic Research LABORE

Abstract: In this study, we scrutinize the effect of labour taxation on employment and growth. We also analyze the effect of other fiscal policy instruments, e.g. the effect of public spending. In this context, our special interest is in the fiscal policy simulations that are neutralized for the government budget. The analysis will be performed with a macroeconomic model (EMMA) developed at the Labour Institute for Economic Research. The study finds that a one percentage point decrease in the income tax ratewhich is financed by increasing government debt improves GDP by 0.58 and employment by 0.25 per cent in the long run. Also, a one percentage point decrease in the income tax rate which isneutralizedfor the government budget by reducing public purchases produces a long-run increase in GDP and employment of a similar magnitude, even though its short-run effect on both variables is negative.

Keywords: labour taxation; macromodels; fiscal policy (search for similar items in EconPapers)
JEL-codes: H22 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2009-03-29
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