Tax progression is good for employment in popular models of trade union behaviour

Erkki Koskela and Jouko Vilmunen

No 3/1994, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: It is a widely held popular belief that the more progressive is the tax system, the greater is the disincentive to work effort. This belief can be justified within the context of conventional labour supply analysis. Increased progression with unchanged tax revenues decreases work effort and is thus bad for employment But does it hold in unionized economies, where trade unions play their role in wage and employment determination? Using three popular models of trade union behaviour - the monopoly union, the 'right-to-manage' and the efficient bargain model - as the framework for analysis this paper provides an unambiguously negative answer; under plausible assumptions an increased tax progression lowers wages and is good for employment in all three popular models of trade union behaviour. This means that effects of taxation appear to be very sensitive to the structure of labour markets.

Date: 1994
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Journal Article: Tax progression is good for employment in popular models of trade union behaviour (1996)
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