The Pain and Gain of Offshoring: The Effects of Tax Progression in a Segmented Labour Market

36 Pages Posted: 29 Feb 2012

See all articles by Silvia Rocha-Akis

Silvia Rocha-Akis

Vienna University of Economics and Business - Department of Economics

Date Written: February 28, 2012

Abstract

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

Suggested Citation

Rocha-Akis, Silvia, The Pain and Gain of Offshoring: The Effects of Tax Progression in a Segmented Labour Market (February 28, 2012). CESifo Working Paper Series No. 3739. Available at SSRN: https://ssrn.com/abstract=2012202

Silvia Rocha-Akis (Contact Author)

Vienna University of Economics and Business - Department of Economics ( email )

Augasse 2-6
A-1090 Wien
Austria

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