Impacts of Labor Taxation with Perfectly and Imperfectly Competitive Domestic Labor Markets under Flexible Outsourcing

40 Pages Posted: 18 Nov 2009

See all articles by Erkki Koskela

Erkki Koskela

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute); Bank of Finland - Research Department; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 2009

Abstract

What are the impacts of labor tax reform on wage setting and employment to keep the relative tax burden per low-skilled and high-skilled workers constant in the case of heterogenous domestic labor markets, i.e. imperfect competition in low-skilled labor and perfect competition in high-skilled labor in the presence of outsourcing? A higher degree of tax progression by raising the wage tax and the tax exemption for the low-skilled workers will decrease the wage rate and increase labour demand of low-skilled workers, whereas it will decrease (increase) employment of high-skilled workers in CES utility function when the elasticity of substitution between consumption and leisure is higher (lower) than one. A higher degree of wage tax progression for the high-skilled worker will have no effect on the high-skilled wage in the presence of CES and C-D utility function so this will have no total employment effects.

Keywords: flexible outsourcing, dual labor market, impacts of labour taxation

JEL Classification: E24, H22, J21, J31, J51

Suggested Citation

Koskela, Erkki, Impacts of Labor Taxation with Perfectly and Imperfectly Competitive Domestic Labor Markets under Flexible Outsourcing (November 2009). CESifo Working Paper Series No. 2852. Available at SSRN: https://ssrn.com/abstract=1507661

Erkki Koskela (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

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Bank of Finland - Research Department ( email )

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IZA Institute of Labor Economics

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