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Wage bargaining, labor-tax progression, and welfare

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  • Clemens Fuest
  • Bernd Huber

Abstract

This paper analyzes the effect of labor-tax progression on employment and welfare in an economy with a unionized labor market. The government influences wage bargaining through its tax policies. Wages can be reduced by increasing the marginal labor-tax rate. If there are no restrictions on profit taxation, a first-best optimum with full employment is realized; this first-best optimum can always be implemented by a progressive tax schedule. If profit taxation is restricted, unemployment may arise. For this case, we show that the welfare-maximizing degree of tax progression is influenced by a variety of factors, in particular the wage elasticity of labor demand, the distribution of bargaining power, and the existence of unemployment benefits. Examples are given for both progressive and regressive tax structures. Comparative-static analysis reveals that a decline in union bargaining power, an increase in unemployment benefits, and an increase in the overall work force reduce the efficient degree of tax progression.
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Suggested Citation

  • Clemens Fuest & Bernd Huber, 1997. "Wage bargaining, labor-tax progression, and welfare," Journal of Economics, Springer, vol. 66(2), pages 127-150, June.
    • Handle: RePEc:kap:jeczfn:v:66:y:1997:i:2:p:127-150
    DOI: 10.1007/BF01234403
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    Cited by:

    1. Aronsson, Thomas & Wikström, Magnus, 2011. "Optimal Tax Progression: Does it Matter if Wage Bargaining is Centralized or Decentralized?," Umeå Economic Studies 829, Umeå University, Department of Economics.
    2. Thomas Aronsson, 2010. "Welfare Measurement, Involuntary Unemployment, And Heterogeneity," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(3), pages 559-571, September.
    3. Aronsson, Thomas & Sjögren, Tomas, 2005. "Externalities, Border Trade and Illegal Production: An Optimal Tax Approach to Alcohol Policy," Umeå Economic Studies 654, Umeå University, Department of Economics.
    4. Albert Jan Hummel & Bas Jacobs, 2018. "Optimal Income Taxation in Unionized Labor Markets," CESifo Working Paper Series 7188, CESifo.
    5. Thomas Aronsson & Luca Micheletto, 2017. "Optimal Redistributive Income Taxation and Efficiency Wages," Working Papers 107, "Carlo F. Dondena" Centre for Research on Social Dynamics (DONDENA), Università Commerciale Luigi Bocconi.
    6. Gustafsson, Johan & Sjögren, Tomas, 2024. "Can Labor Market Imperfections Motivate the Implementation of an Income-Based Pension System?," Umeå Economic Studies 1024, Umeå University, Department of Economics.
    7. Thomas Piketty & Emmanuel Saez & Stefanie Stantcheva, 2014. "Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 230-271, February.
    8. Aronsson, Thomas & Koskela, Erkki, 2008. "Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment," Umeå Economic Studies 759, Umeå University, Department of Economics.
    9. Thomas Aronsson Aronsson & Thomas Jonsson & Tomas Sjögren, 2006. "Environmental Policy and Optimal Taxation in a Decentralized Economic Federation," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(3), pages 437-454, September.
    10. Aronsson, Thomas & Sjogren, Tomas, 2004. "Efficient taxation, wage bargaining and policy coordination," Journal of Public Economics, Elsevier, vol. 88(12), pages 2711-2725, December.
    11. Thomas Aronsson & Tomas Sjögren, 2010. "Optimal income taxation and social norms in the labor market," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(1), pages 67-89, February.
    12. Aronsson, Thomas & Wehke, Sven, 2008. "Public goods, unemployment and policy coordination," Regional Science and Urban Economics, Elsevier, vol. 38(3), pages 285-298, May.
    13. Boeters, Stefan, 2011. "Optimal tax progressivity in unionised labour markets: What are the driving forces?," Economic Modelling, Elsevier, vol. 28(5), pages 2282-2295, September.
    14. Aronsson, Thomas & Micheletto, Luca, 2017. "Optimal Redistributive Income Taxation and Efficiency Wages," Umeå Economic Studies 953, Umeå University, Department of Economics.
    15. Thomas Aronsson & James R. Walker, 2010. "Labor Supply, Tax Base and Public Policy in Sweden," NBER Chapters, in: Reforming the Welfare State: Recovery and Beyond in Sweden, pages 127-158, National Bureau of Economic Research, Inc.
    16. Tomas Kögel, 2005. "On Substituting Consumption Taxes for Unemployment Insurance Contributions to Reduce Unemployment," Discussion Paper Series 2005_11, Department of Economics, Loughborough University, revised Sep 2005.
    17. Aart Gerritsen, 2016. "Equity and Efficiency in Rationed Labor Markets," Working Papers tax-mpg-rps-2016-04, Max Planck Institute for Tax Law and Public Finance.
    18. Thomas Aronsson, 2005. "Environmental Policy, Efficient Taxation and Unemployment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(2), pages 131-144, March.
    19. Aronsson, Thomas & Persson, Lars & Sjögren, Tomas, 2006. "Optimal Taxation and Transboundary Externalities - Are Endogenous World Market Prices Important?," Umeå Economic Studies 699, Umeå University, Department of Economics.
    20. Hummel, Albert Jan & Jacobs, Bas, 2023. "Optimal income taxation in unionized labor markets," Journal of Public Economics, Elsevier, vol. 220(C).
    21. Gerritsen, Aart, 2017. "Equity and efficiency in rationed labor markets," Journal of Public Economics, Elsevier, vol. 153(C), pages 56-68.
    22. Boeters, Stefan & Böhringer, Christoph & Feil, Michael, 2002. "Taxation and unemployment: an applied general equilibrium approach for Germany," ZEW Discussion Papers 02-39, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    Keywords

    tax progression; unemployment; trade unions; H21; H23; J51;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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