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Does Centralised Wage Setting Lead into Higher Taxation?

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  • Pekka Sinko

    (Prime Minister's Office, Economic Council)

Abstract

This paper studies implications of centralised wage setting for the level of taxation and public expenditures in an analytical model with unionised labour markets. We extend the previous studies by allowing both demand and supply effects of labour. Also, in addition to the standard social planner approach, we consider a political economy set up, where the tax rate is chosen to maximise welfare of a median voter. Our results suggest that when working hours are endogenous, the relationship between the degree of centralisation and the labour tax rate is ambiguous. In particular, if the marginal utility from public provision is sufficiently low, centralised wage setting implies lower optimal tax rate on labour. This is due to a 'budgetary discipline effect', which reduces the optimal tax rate preferred by the median voter under centralised wage setting.

Suggested Citation

  • Pekka Sinko, 2005. "Does Centralised Wage Setting Lead into Higher Taxation?," Labor and Demography 0509007, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpla:0509007
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    References listed on IDEAS

    as
    1. Sinko, Pekka & Kilponen, Juha, 2001. "Labour Taxation and the Degree of Centralisation in a Trade Union Model with Endogenous Labour Supply," Discussion Papers 250, VATT Institute for Economic Research.
    2. Daniele Checchi & Claudio Lucifora, 2002. "Unions and labour market institutions in Europe [‘Deunionisation, technical change and inequality’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 17(35), pages 361-408.
    3. Erkki Koskela & Ronnie Schöb, 2002. "Alleviating Unemployment: The Case for Green Tax Reforms," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 20, pages 355-378, Edward Elgar Publishing.
    4. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 15(30), pages 48-104.
    5. Driffill, John & van der Ploeg, Frederick, 1993. "Monopoly Unions and the Liberalisation of International Trade," Economic Journal, Royal Economic Society, vol. 103(417), pages 379-385, March.
    6. Kiander, Jaakko & Holm, Pasi & Koskela, Erkki, 1995. "Unions, Labour supply and Structure of Taxation: Equal Tax Bases," Discussion Papers 110, VATT Institute for Economic Research.
    7. Sinko, Pekka, 1999. "Taxation, Employment and the Environment - General Equilibrium Analysis with Unionised Labour Markets," Research Reports 54, VATT Institute for Economic Research.
    8. Kiander, Jaakko & Kilponen, Juha & Vilmunen, Jouko, 2000. "Taxes, Growth and Unemployment in the OECD Countries - Does Collective Bargaininig Matter?," Discussion Papers 235, VATT Institute for Economic Research.
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    Cited by:

    1. Michael Mitsopoulos, 2017. "Overtaxation of Private Sector Salaried Employment as a Key Impediment to the Recovery of Greece," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Dimitrios D. Thomakos & Konstantinos I. Nikolopoulos (ed.), Taxation in Crisis, chapter 12, pages 289-336, Palgrave Macmillan.
    2. Michael MITSOPOULOS & Theodore PELAGIDIS, 2021. "Labor Taxation And Investment In Developed Countries. The Impact On Employment," Regional Science Inquiry, Hellenic Association of Regional Scientists, vol. 0(2), pages 13-31, June.

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    More about this item

    Keywords

    Taxation; wage setting; public expenditure;
    All these keywords.

    JEL classification:

    • J - Labor and Demographic Economics

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