Optimal tax progressivity in unionised labour markets: what are the driving forces?

In labour markets with collective wage bargaining higher progressivity of the labour income tax creates a trade-off. On the one hand, wages are lowered and unemployment decreases, on the other hand, the individual labour supply decision is distorted at the hours-of-work margin. The optimal level of tax progressivity within this trade-off is determined using a numerical general equilibrium model with imperfect competition on the goods market, collective wage bargaining and a labour-supply module calibrated to empirically plausible elasticity values. The model is calibrated to macroeconomic and institutional parameters of both the OECD average and a number of individual OECD-countries. In most cases the optimal degree of tax progressivity is below the actual level. A decomposition approach shows that the optimal level is increased by high unemployment and by the general tax level. --labour taxation,tax progressivity,optimal taxation,collective wage bargaining,unemployment

Optimal tax progressivity in unionised labour markets; what are the driving forces?

In labour markets with collective wage bargaining, progressivity of the labour income tax creates a trade-off that allows the degree of progressivity to be determined optimally. On the one hand, wages are lowered and unemployment decreases, on the other hand, the individual labour supply decision is distorted at the hours-of-work margin. The optimal level of tax progressivity within this trade-off is determined using a numerical general equilibrium model with imperfect competition on the goods market, collective wage bargaining and a labour-supply module calibrated to empirically plausible elasticity values. The model is calibrated to macroeconomic and institutional parameters of both the OECD average and a number of individual OECD countries. In most cases the optimal degree of tax progressivity is below the actual level. A decomposition approach shows that the optimal level is increased by high unemployment and by the general tax level.

Green tax reform and employment: the interaction of profit and factor taxes

The employment effects of an ecological tax reform depend decisively on the presence of a profit tax and on the extent to which profits are taxed. This is shown in a model where firms have monopoly power on product markets and bargain over wages with unions on the labour market. In the setting, the value of the employment-maximising energy tax rate depends on the level of the profit tax. The question of wheather there is unemployment or not turns out to be less important. --factor taxes,profit taxes,ecological tax reform,trade unions,unemployment

Optimal tax progressivity in unionised labour markets: Simulation results for Germany

Changing the income tax progressivity in labour markets with collective wage bargaining generates a trade-off. On the one hand, higher progressivity distorts individual labour supply decisions at the hours-of-work margin, on the other hand, it reduces unemployment by exerting downward pressure on wages. This trade-off is quantitatively assessed using a numerical model for Germany. The model combines a microsimulation module, which captures the labour-supply decisions of approximately 4600 individual households, and a macro (computable general equilibrium) module, which features collective wage bargaining and involuntary unemployment. In the simulations carried out using this model, the optimal degree of tax progressivity turns out to be higher than the one in the actual German tax schedule. The optimum is located at marginal tax rates that are 6 percentage points higher than the actual rates (combined with a transfer that balances the public budget). The welfare gain from such a reform is modest, however. It amounts to no more than two euros per person per month. --labour taxation,tax progressivity,optimal taxation,collective wage bargaining,unemployment,microsimulation,computable general equilibrium model

Heterogeneous labour markets in a microsimulation-AGE model : application to welfare reform in Germany

"Labour market reforms that are designed to stimulate labour supply at the lower end of the wage distribution can never be precisely restricted to affect only the target group. Spillovers to and feedback from other segments of the labour market are unavoidable and may counteract the direct effects of the reform. An adequate representation of heterogeneous labour markets becomes therefore an important issue for the assessment of reforms. We analyse the possible interactions between labour market segments in a combined, consistent microsimulation-AGE model with a flexible representation of substitution possibilities and different wage-forming regimes. We look at a stylised reform and find labour-demand cross-price elasticities between the low and medium skilled to be the main drivers of the results. Interaction with the high-skilled segment is less pronounced." (Author's abstract, IAB-Doku) ((en))Niedrigqualifizierte, mittlere Qualifikation, Hochqualifizierte, Lohnfindung, Anreizsystem, Leistungskürzung, Arbeitslose, aktivierende Arbeitsmarktpolitik - Auswirkungen, Beschäftigungseffekte, Erwerbsverhalten, Arbeitskräfteangebot, Lohnhöhe, Einkommensverteilung, Bruttoinlandsprodukt, öffentliche Einnahmen, Konsum, Investitionen, Kapitalmobilität, Arbeitsmarktmodell, Heterogenität

Heterogeneous labour markets in a microsimulation-AGE model: application to welfare reform in Germany

Labour market reforms that are designed to stimulate labour supply at the lower end of the wage distribution can never be precisely restricted to affect only the target group. Spillovers to and feedback from other segments of the labour market are unavoidable and may counteract the direct effects of the reform. An adequate representation of heterogeneous labour markets becomes therefore an important issue for the assessment of reforms. We analyse the possible interactions between labour market segments in a combined, consistent microsimulation-AGE model with a flexible representation of substitution possibilities and different wage-forming regimes. We look at a stylised reform and find labour-demand cross-price elasticities between the low and medium skilled to be the main drivers of the results. Interaction with the high-skilled segment is less pronounced. --Applied general equilibrium model,microsimulation,discrete working time choice,heterogeneous labour markets,labour market reform

The Labour Market in CGE Models

This paper reviews options of labour market-modelling in a CGE framework. On the labour-supply side, two principal modelling options are distinguished and discussed: aggregated, representative households and microsimulation based on individual household data.On the labour-demand side, we focus on the substitution possibilities between different types of labour in production.With respect to labour-market coordination, we discuss several wage-forming mechanisms and involuntary unemployment. � �

Reforming Social Welfare in Germany: An Applied General Equilibrium Analysis

This paper analyses the effects of a social assistance reform in Germany. In contrast to studies which are based on microsimulation methods we use a computable general equilibrium model which incorporates a discrete choice model of labour supply to simulate a variety of reform scenarios. The main contribution is that we are able to identify general equilibrium effects of a reform on wages and unemployment. The simulation results show that general equilibrium wage reactions tend to mitigate labour supply effects. Moreover, the simulations indicate that substantial employment effects are to be expected only from major cuts in welfare payments. --social assistance,discrete labour supply model,applied general equilibrium

Optimal Tax Progressivity in Unionised Labour Markets: Simulation Results for Germany

Abstract Changing the income tax progressivity in labour markets with collective wage bargaining generates a trade-off. On the one hand, higher progressivity distorts individual labour supply decisions at the hours-of-work margin, on the other hand, it reduces unemployment by exerting downward pressure on wages. This trade-off is quantitatively assessed using a numerical model for Germany. The model combines a microsimulation module, which captures the labour-supply decisions of approximately 4,600 individual households, and a macro (computable general equilibrium) module, which features collective wage bargaining and involuntary unemployment. In the simulations carried out using this model, the optimal degree of tax progressivity turns out to be higher than the one in the actual German tax schedule. The optimum is located at marginal tax rates that are 6 percentage points higher than the actual rates (combined with a transfer that balances the public budget). The welfare gain from such a reform is modest, however. It amounts to no more than two euros per person per month

Tax Progressivity and the Trade Union’s Fallback-Option

When we analyse the labour market consequences of labour tax reforms in a model of firm-union wage bargaining, minor changes in the formulation of the union’s fallback option can have drastic effects. This paper compares two variants of the model in which either workers have no reemployment opportunity or the probability of employment in another sector is determined by the overall unemployment rate. It is argued both on analytical and numerical grounds that the second alternative is the only plausible one. This conclusion is confirmed by an explicit integration of workers' inter-sectoral mobility into the model