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Factor Market Dynamics and the Incidence of Taxes and Subsidies

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  • Daniel S. Hamermesh

Abstract

We extend work on payroll tax incidence by recognizing that labor markets adjust slowly because of the slow adjustment of both labor demand and supply to their equilibrium values. We modify the basic model of the incidence of payroll taxes with variable factor supply to include dynamic adjustments. We find that, under reasonable assumptions about the magnitudes of the lags in adjustment, it takes several years before half of the distance to a new equilibrium in wages and employment is reached. Thus, even if payroll taxes are borne by labor in the long run, a large part of any increase in the tax will be borne by capital for some time. For purposes of policy, the effects of payroll tax increases must be analyzed as if part of their effect is on profits, regardless of the long-run distribution of the burden.

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  • Daniel S. Hamermesh, 1980. "Factor Market Dynamics and the Incidence of Taxes and Subsidies," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(4), pages 751-764.
    • Handle: RePEc:oup:qjecon:v:95:y:1980:i:4:p:751-764.
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    File URL: http://hdl.handle.net/10.2307/1885490
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    Citations

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    Cited by:

    1. Jens Horbach & Markus Janser, 2016. "The role of innovation and agglomeration for employment growth in the environmental sector," Industry and Innovation, Taylor & Francis Journals, vol. 23(6), pages 488-511, August.
    2. Paul Mortimer-Lee, 2021. "The New Employment Tax," National Institute of Economic and Social Research (NIESR) Policy Papers 30, National Institute of Economic and Social Research.
    3. Blinder, Alan S, 1988. "The Challenge of High Unemployment," American Economic Review, American Economic Association, vol. 78(2), pages 1-15, May.
    4. repec:eee:labchp:v:1:y:1986:i:c:p:429-471 is not listed on IDEAS
    5. Toshiaki Tachibanaki, 2003. "The Role of Firms in Welfare Provision," NBER Chapters, in: Labor Markets and Firm Benefit Policies in Japan and the United States, pages 315-338, National Bureau of Economic Research, Inc.
    6. María Isabel Escobedo, 1991. "Un análisis empírico de los efectos finales producidos sobre el empleo industrial por el sistema de financiación de la Seguridad Social española 1975-1983," Investigaciones Economicas, Fundación SEPI, vol. 15(1), pages 169-192, January.
    7. Libor Dušek & Petr Janský, 2012. "Dopady změn daně z přidané hodnoty na reálné příjmy domácností [The Impact of VAT Changes on the Households´ Real Incomes]," Politická ekonomie, Prague University of Economics and Business, vol. 2012(3), pages 309-329.
    8. Andreas Knabe & Ronnie Schöb, 2009. "Minimum Wage Incidence: The Case for Germany," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(4), pages 403-441, December.
    9. Henri-Paul Rousseau & Francis Taurand, 1984. "Financement de la securite du revenu et taxes sur la masse salariale," Canadian Public Policy, University of Toronto Press, vol. 10(4), pages 459-467, December.
    10. Holmlund, Bertil, 1983. "Payroll Taxes and Wage Inflation: The Swedish Experiences," Working Paper Series 68, Research Institute of Industrial Economics.

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