Labor Taxes and Wages: Evidence from Italy

30 Pages Posted: 28 Jun 2002

See all articles by Giorgio Brunello

Giorgio Brunello

University of Padua - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)

Maria Laura Parisi

University of Brescia, Department of Economics and Management

Daniela Sonedda

University College London - Department of Economics; Universita degli Studi del Piemonte Orientale "Amedeo Avogadro" - Dipartimento di Scienze Economiche e Metodi Quantitativi

Date Written: May 2002

Abstract

We study the empirical relationship between labor taxation and pretax wages in Italy. We find that higher tax progressivity increases pretax wages. To explain this result, we introduce in an informal way a relative wage effect and argue that the combination of this effect with the labor supply effect dominates the wage moderation effect. We find also evidence that changes in payroll taxes are not fully absorbed by offsetting changes in the pretax wage and affect labor costs and employment. The evidence on the effect of the average income tax rate on pretax wages is more mixed, but it also points to the presence of some degree of real wage resistance. Finally, we find significant differences in the relationship between labor taxes and pretax wages by age group but not by skill or region of residence.

Keywords: Progressive Taxation, Wage Determination, Italy

JEL Classification: H24

Suggested Citation

Brunello, Giorgio and Parisi, Maria Laura and Sonedda, Daniela, Labor Taxes and Wages: Evidence from Italy (May 2002). Available at SSRN: https://ssrn.com/abstract=316623 or http://dx.doi.org/10.2139/ssrn.316623

Giorgio Brunello (Contact Author)

University of Padua - Department of Economics ( email )

via Del Santo 33
35121 Padova
Italy
+39 049 827 4223 (Phone)
+39 049 827 4221 (Fax)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Maria Laura Parisi

University of Brescia, Department of Economics and Management ( email )

via San Faustino 74/b
Brescia, 25122
Italy
+39 0302988826 (Phone)
+39 0302988837 (Fax)

Daniela Sonedda

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

Universita degli Studi del Piemonte Orientale "Amedeo Avogadro" - Dipartimento di Scienze Economiche e Metodi Quantitativi ( email )

Via Perrone 18
28100 Novara
Italy

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