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The Real Effects of Tax-Based Incomes Policies

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  • Jackman, Richard
  • Layard, Richard

Abstract

The authors show how (in the context of a steady inflation rate) a tax-based incomes policy reduces the NAIRU. This is so in a one-sector world of involuntary unemployment, based on efficiency wages or decentralized union bargaining. It holds in a two-sector world in which there is a secondary market-clearing sector; here the proportional effect on unemployment will be larger than in a one-sector world, provided the labor supply elasticity to the secondary sector is sufficiently high. The most obvious problem with a tax-based incomes policy is its effect on worker effort. The authors show, however, that even allowing for this, a tax-based incomes policy will raise social welfare provided the elasticity of effort with respect to wages is sufficiently low. Copyright 1990 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Jackman, Richard & Layard, Richard, 1990. "The Real Effects of Tax-Based Incomes Policies," Scandinavian Journal of Economics, Wiley Blackwell, vol. 92(2), pages 309-324.
    • Handle: RePEc:bla:scandj:v:92:y:1990:i:2:p:309-24
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    Cited by:

    1. Smith, Tony E. & Zenou, Yves, 1997. "Dual Labor Markets, Urban Unemployment, and Multicentric Cities," Journal of Economic Theory, Elsevier, vol. 76(1), pages 185-214, September.
    2. Huttunen, Kristiina & Pirttilä, Jukka & Uusitalo, Roope, 2013. "The employment effects of low-wage subsidies," Journal of Public Economics, Elsevier, vol. 97(C), pages 49-60.
    3. Lassila, Jukka, . "Essays on Taxes and Wage Formation," ETLA A, The Research Institute of the Finnish Economy, number 32.
    4. Lassila, Jukka, 1998. "Tax threats and wage formation," Labour Economics, Elsevier, vol. 5(2), pages 167-183, June.
    5. Bowitz, Einar & Cappelen, Adne, 2001. "Modeling income policies: some Norwegian experiences 1973-1993," Economic Modelling, Elsevier, vol. 18(3), pages 349-379, August.
    6. Barth, Erling, 1991. "Disagreement Points in Wage Bargaining," Institute for Research on Labor and Employment, Working Paper Series qt2m9228d4, Institute of Industrial Relations, UC Berkeley.

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