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Taxation of labour: the effect of labour taxes and costs on employment in Macedonia

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  • Nikica Mojsoska-Blazevski

Abstract

The objective of this article is to investigate the effect of tax and social contributions reforms on employment in Macedonia, through estimating a labour demand function over the period 1998:Q1--2010:Q3. The results are used to establish a foundation for an evidence-based policy for increasing employment in a country with high unemployment, while recognising the reality of budget constraints. The article disaggregates the total tax wedge into an income tax wedge and a social contributions wedge, in order to test the argument that the main burden on labour in transition economies stems from social contributions and not from income taxation, mainly due to the dominance of unskilled jobs in those countries. We also impose a control for the introduction of the gross wage concept in 2009, which is said to have had the effect of reducing the informal economy. We find that the reduction of social contributions has a significant effect on employment in Macedonia, ranging from 0.9 to 3.1 percentage points. The effect of the income tax wedge is found to be insignificant. Moreover, the estimates relating to the gross wage concept and the associated measures provide some evidence for the view that the reform generated a transfer from the informal economy into formal employment, thus most probably shrinking the grey economy in the country.

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  • Nikica Mojsoska-Blazevski, 2012. "Taxation of labour: the effect of labour taxes and costs on employment in Macedonia," Post-Communist Economies, Taylor & Francis Journals, vol. 24(2), pages 241-256, December.
    • Handle: RePEc:taf:pocoec:v:24:y:2012:i:2:p:241-256
    DOI: 10.1080/14631377.2012.675158
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    References listed on IDEAS

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    1. World Bank, 2009. "Estimating the Impact of Labor Taxes on Employment and the Balances of the Social Insurance Funds in Turkey," World Bank Publications - Reports 28211, The World Bank Group.
    2. Adriana Kugler & Maurice Kugler, 2009. "Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia," Economic Development and Cultural Change, University of Chicago Press, vol. 57(2), pages 335-358, January.
    3. Herwig Immervoll, 2007. "Minimum Wages, Minimum Labour Costs and the Tax Treatment of Low-Wage Employment," OECD Social, Employment and Migration Working Papers 46, OECD Publishing.
    4. Karsten Staehr, 2008. "Estimates of employment and welfare effects of personal labour income taxation in a flat-tax country : The case of Estonia," Bank of Estonia Working Papers 2008-03, Bank of Estonia, revised 30 Oct 2008.
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    Cited by:

    1. Mojsoska-Blazevski, Nikica & Petreski, Marjan & Petreska, Despina, 2013. "Increasing labour market activity of poor and female: Let’s make work pay in Macedonia," MPRA Paper 57228, University Library of Munich, Germany.
    2. Ranđelović Saša & Žarković Rakić Jelena & Vladisavljević Marko & Vujić Sunčica, 2019. "Labour Supply and Inequality Effects of In-Work Benefits: Evidence from Serbia," Naše gospodarstvo/Our economy, Sciendo, vol. 65(3), pages 1-22, September.

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