Rafael Domenech and Jose Ramon Garcia
This paper
considers the financing of productive public goods and social
benefits through different types of taxes in a model with
unemployment. We incorporate unemployment, caused by the
wage-setting behaviour of a monopolistic union, in a neoclassical
growth model which integrates a quite detailed structure of taxes
used to finance productive public expenditures and social transfers
and parameterizes the inefficiency of government to transform taxes
into public goods or transfers. The main conclusion is that the
relationship between unemployment and labour taxes critically
depends on the degree of government efficiency and the unions'
perception on how wages affect the welfare state. If unions
internalize that transfers and social benefits are closely related
to labour taxes, they do not pressure for higher wages in response
to higher taxes. This result offers an alternative explanation to
the lack of a positive correlation between unemployment and labour
taxes in most OECD countries and periods, whereas the empirical
evidence for 21 OECD countries support the effects on unemployment
rates of the interaction between taxes and government inefficiency.
Paper (pdf)
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