Taxation, wage formation, unemployment and welfare

Abstract: This thesis consists of four self-contained essays on the impact of taxation on wage formation,unemployment and welfare.Essay I (with Bertil Holmlund) examines how a progressive tax system affects wageformation. When there is bargaining over wages, a rise in tax progressivity is likely to lead towage moderation because it makes real labour costs, and thereby employment, more sensitiveto changes in the real wage. Increased tax progressivity may therefore reduce the equilibriumunemployment rate. Our empirical analyses of wage determination exploits two Swedish datasets. One data set contains time series on wages among workers in different skill categories;the other data set is a panel for 1989-92 with detailed information on individual workers. Theresults from the two data sets are broadly consistent with the theory, implying that taxprogression contributes to wage moderation.Essay II investigates the impact of payroll taxes on unemployment and welfare in a two-sectoreconomy characterised by imperfect competition in product and labour markets. The twosectors differ in market competitiveness. It turns out that only the relative tax pressure affectsunemployment and welfare. Unemployment can be reduced by having the less competitivesector pay higher taxes. Moreover, differentiated payroll taxes will, in general, improveefficiency. Which sector to tax relatively more is, however, not clear. The government face a trade-off in the sense that employment is increased only at the expense of reduced efficiency inthe output mix. An explicit expression for the optimal degree of tax differentiation is derived.Essay III (with Bertil Holmlund) examines the effects of an environmental tax reform in amodel of a small open economy with decentralised wage bargaining and monopolisticallycompetitive firms. The economy includes a tradable sector and a non-tradable sector andfeatures unemployment in equilibrium. Firms in both sectors use labour and an importedpolluting factor of production ("energy"). A tax on energy, recycled to reduce the payroll tax,will in general affect equilibrium unemployment in this economy. The effect works through areallocation of employment from the tradable to the non-tradable sector. Total employmentincreases if unions in the non-tradable sector possess less market power than the unions in thetradable sector. Parameterised versions of the model suggest that the tax reform has smalleffects on employment and that it typically reduces real GDP.Essay IV investigates the impact of payroll taxes on unemployment and welfare in a modelwith household production and union-firm wage bargaining. It turns out that differentiatedpayroll taxes can be justified on both employment and efficiency grounds. Reduced taxation inthe sector producing household substitutes financed with higher taxes in the rest of theeconomy reduces unemployment if the former sector is more, or equally, labour intensive asthe rest of the economy. Moreover, welfare increases with the differentiation if the sectorproducing household substitutes is equally labour intensive as the rest of the economy.