Analysis of Labor Tax Progression Under Heterogeneous Domestic Labor Markets and Flexible Outsourcing

36 Pages Posted: 15 Nov 2010

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 15, 2010

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 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

Suggested Citation

Koskela, Erkki, Analysis of Labor Tax Progression Under Heterogeneous Domestic Labor Markets and Flexible Outsourcing (November 15, 2010). CESifo Working Paper Series No. 3239. Available at SSRN: https://ssrn.com/abstract=1709271

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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