The Pain and Gain of Offshoring: The Effects of Tax Progression in a Segmented Labour Market
36 Pages Posted: 29 Feb 2012
Date Written: February 28, 2012
Over the previous two decades, many OECD countries have lowered the degree of progressivity in their tax structures. In this paper, I investigate labour tax progression in a world characterized by a segmented labour market where the higher-paying jobs are rationed due to oligopolistic market structures, insider-oriented unions and international offshoring. In this second-best world, a revenue-neutral decrease in the progressivity of the tax schedule promotes higher domestic (net-of-tax) wage inequality where a shrinking fraction of workers provides the tax revenue to finance the redistribution to an increasing share of lower-wage workers. However, as the tax reform involves an increase in the offshoring intensity, which may translate into a cost advantage for the domestic average consumer, the overall welfare effect is ambiguous. It is shown that the negative effects dominate if trade unions are sufficiently insider-oriented.
Keywords: relocation, unionised oligopoly, labour market segmentation, labour income tax progression, trade union preferences
JEL Classification: L130, H200, F160, J500
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