The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure

Pissarides, Christoforos Antoniou

doi:10.1016/s0014-2921(97)00090-1

Cited by 302 publications

(246 citation statements)

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“…This, in turn, creates upward pressure on wages, but it cannot overcompensate the original wage reduction. Hence, our model confirms the finding in the earlier literature that, in matching labor markets with Nash bargaining over wages, higher progression in labor income taxes decreases structural unemployment; see also Pissarides (1998) or Sørensen (1999.…”

Section: By Inspectingsupporting

confidence: 90%

“…Possible alternative ways of specifying tax progressivity in line with, for example, Pissarides (1998Pissarides ( , 2000, Sinko (2007) or Zanetti (2011), do not alter the results we shall derive below qualitatively.…”

Section: Householdsmentioning

confidence: 78%

“…A comprehensive overview of earlier studies from the 1990s and early 2000s is given by Røed and Strøm (2002). In a model with a matching labor market, Pissarides (1998) and Sørensen (1999) show that a more progressive tax schedule increases employment when wages are Nash-bargained over. Our analysis confirms their finding in a real business cycle framework taking into account the feedback of the labor market to the rest of the economy.…”

Section: Introductionmentioning

confidence: 99%

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Structural and Cyclical Effects of Tax Progression

Kremer¹,

Stähler²

2016

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Tax progression is a major attribute of current tax systems and a major element of redistribution policy. Theoretically, there is no clear answer to the question of how progressive taxes should be. In practice, approaches have differed both over time and from country to country. While top rates of income taxes have declined since the 1980s and the number of tax brackets has decreased in many countries, the overall progressivity of public tax and transfer systems has not necessarily been on a downward trend. Furthermore, top rates have been raised again as part of a number of recent consolidation packages, which has been seen as a new tendency towards higher tax progression. Besides implications for structural unemployment and income distribution, the dynamic properties of tax progression is attracting renewed interest. Given stronger calls for countercyclical fiscal policy and the shortcomings of ad hoc fiscal interventions in practice, it might be asked what role tax progression can play in the game of "timely, targeted and temporary" automatic stabilization.In this paper, we discuss distributional aspects of tax progression only very briefly and in a highly stylized manner. Instead, we focus on two other issues: the structural and cyclical consequences of a progressive tax system when labor markets are imperfect. In such economies, tax progression may curb workers' wage claims and, thus, decrease structural unemployment. Furthermore, changes in average tax rates over the business cycle induced by tax progression may dampen net income fluctuations. By combining these two issues in a real business cycle model with labor market frictions and creditconstrained consumers, we are able to assess, in particular, the relative importance of the structural and cyclical impact of tax progression on welfare.We find that a more progressive tax schedule reduces structural unemployment as it decreases wages and, thus, fosters long-run incentives for job creation. However, since the costs of filling a vacancy increase when unemployment falls, there exists an optimal level of unemployment ("Hosios condition"). Therefore, tax progression improves steady-state welfare up to a certain threshold and harms it beyond that. We also show that tax progression always increases the costs of business cycles for consumers who can shift consumption intertemporally through saving and borrowing (optimizers), while it always reduces the business cycle costs for credit constrained households (rule-of-thumb consumers). The latter is due to less volatile net wages, while the former follows from progressivity-induced tax rate volatility and an income effect resulting from employment stabilization. Our analysis suggests that the business cycle effect dominates the steadystate effect. Overall, tax progression seems welfare-enhancing up to a certain threshold and always shifts relative utility from optimizers to rule-of-thumb consumers. Nicht-technische Zusammenfassung AbstractIn a real business cycle model with labor market frictions, we find that a...

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Section: By Inspectingsupporting

confidence: 90%

Section: Householdsmentioning

confidence: 78%

Section: Introductionmentioning

confidence: 99%

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Structural and Cyclical Effects of Tax Progression

Kremer¹,

Stähler²

2016

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“…This implies that there is "real wage resistance" in an imperfect labour market. 4 It is consistent with a situation where unemployment benefits, and hence the reservation wage, is fully indexed on the real wage rate (Pissarides, 1998). We argue that the more progressive the tax system is, the stronger will be the impact of (un-)employment on wages.…”

supporting

confidence: 59%

Automatic Stabilisers and Market Flexibility in EMU

Buti¹,

Martínez-Mongay²,

Sekkat³

et al. 2002

OECD Economics Department Working Papers

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JT00129991It is often claimed that tax and welfare reforms that aim at enhancing efficiency may come at the cost of cyclical stabilisation. Reducing the generosity of welfare systems and lowering taxes may boost efficiency and output, and improve market adjustment to shocks. But, by reducing the size of automatic stabilisers, it may also imply less cyclical smoothing. This would be unwelcome in EMU given the loss of national monetary autonomy and the well-known pitfalls of active fiscal management. This paper argues that the alleged trade-off between efficiency/flexibility and stabilisation may not exist. We show that, if the initial level of the tax burden is high, reducing it may lead to higher output stabilisation in the event of a supply shock and higher inflation stabilisation in the event of a demand shock. The threshold level of taxation depends on the preferences of the central bank over inflation and output. Econometric and numerical simulations show that European countries -especially small ones -might have a tax burden close to or even higher than the threshold level. JEL codes: E52, E61, F42Keywords: Fiscal Policy, Automatic Stabilisers, Economic and Monetary Union, Shocks ********* Stabilisateurs automatiques et flexibilité de marchés de l'UEM. Y-a-t-il un compromis ?On a souvent proclamé que les réformes fiscales et sociales ayant pour objectif d'augmenter l'efficacité économique pouvaient se faire au détriment de la stabilisation des cycles économiques. En effet, la réduction de la générosité des systèmes de sécurité sociale et l'abaissement des impôts tendent à accroître l'efficacité de l'activité économique et à améliorer la capacité d'ajustement des marchés aux chocs. Cependant, réduire la taille des stabilisateurs automatiques peut également impliquer une augmentation des oscillations cycliques. Cela serait contrariant au sein de l'UEM, étant donné la perte d'autonomie monétaire au niveau national, ainsi que les problèmes associés à l'activisme fiscal. Cet article établi que la contradiction potentielle entre efficacité/flexibilité et stabilisation peut ne pas exister. Nous montrons que, lorsque le niveau initial des prélèvements obligatoires est élevé, sa réduction peut renforcer la stabilisation de la production en réponse à un choc d'offre et celle des prix en réponse à un choc de demande. Le seuil d'imposition dépend des préférences de la banque centrale entre l'inflation et la production. Les simulations économétriques et numériques suggèrent également que les pays européens -en particulier les petits pays -puissent avoir un niveau de charges fiscales proche (voire au-delà) du seuil.

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“…By 1 These contributions employ dynamic general equilibium one-sector setups. Analyses of labor taxation based on partial equilibrium models, instead, are provided, for example, by Layard, Nickell, and Jackman (1991), and Pissarides (1998).…”

Section: Introductionmentioning

confidence: 99%

Two-sector perspectives on the effects of payroll tax cuts and their financing

Petrucci

Phelps

2009

Journal of Public Economics

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This paper analyzes the consequences of lifting from labor some of the burden of taxation in a life-cycle two-sector setup where a consumption good is produced alongside a capital good. The analysis focuses on the implications of alternative ways of financing payroll tax cuts in closed and small open neoclassical economies. In our model payroll tax cuts do not necessarily stimulate hours worked in the stationary state. We show, for example, that in the closed economy -paradoxically-long-run aggregate labor hours and the capital stock will be reduced if labor tax proceeds are replaced by capital taxation.If instead government purchases of the capital good or labor services are decreased, manhours are left unchanged in the long-run, while capital formation is spurred. Hours worked and nonhuman wealth are increasead if the payroll tax cut is offset by cuts in welfare entitlements, public spending on the consumption good or the value-added

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The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure

Cited by 302 publications

References 20 publications

Structural and Cyclical Effects of Tax Progression

Structural and Cyclical Effects of Tax Progression

Automatic Stabilisers and Market Flexibility in EMU

Two-sector perspectives on the effects of payroll tax cuts and their financing

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