Employment Effects of Labour Taxation in an Efficiency Wage Model with Alternative Budget Constraints and Time Horizons

17 Pages Posted: 6 Oct 2000

See all articles by Laszlo Goerke

Laszlo Goerke

University of Trier - Institute of Labour Law and Industrial Relations in the European Union; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Date Written: May 2000

Abstract

In an efficiency wage economy with variable profits, a shift from payroll to employment taxes will reduce unemployment if the tax level is held constant at the initial wage. However, unemployment will rise if firms are constrained to zero profits in the long-run and if tax revenues are constant. This reversal of employment effects occurs because the shift in taxes reduces wages. This implies a budget deficit. Hence, taxes will have to be raised if revenues are held constant. If the firm's profits cannot change, the tax increase will cause some firms to close down and unemployment will rise. Thus, the predicted employment consequences of changes in the tax structure depend on assumptions about the time-horizon and budget constraint.

Keywords: Efficiency Wages, Long-Run, Short-Run, Labour Taxes

JEL Classification: H22, H25, J32, J41

Suggested Citation

Goerke, Laszlo, Employment Effects of Labour Taxation in an Efficiency Wage Model with Alternative Budget Constraints and Time Horizons (May 2000). IZA Discussion Paper No. 148. Available at SSRN: https://ssrn.com/abstract=233900

Laszlo Goerke (Contact Author)

University of Trier - Institute of Labour Law and Industrial Relations in the European Union ( email )

Behringstra├če 21, 7. Floor, Building H
Trier, 54296
Germany

HOME PAGE: http://www.iaaeu.de/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

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