Analysis of Labor Tax Progression Under Heterogeneous Domestic Labor Markets and Flexible Outsourcing
37 Pages Posted: 14 Nov 2010
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 heterogeneous 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 labor 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 utility function.
Keywords: heterogeneous domestic labor markets, wage bargaining, impacts of labor taxation, outsourcing
JEL Classification: E24, H22, J21, J31, J51
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