Non-Equivalence of Employment and Payroll Taxes in Imperfectly Competitive Labor Markets.
Bo Sandemann Rasmussen
University of Aarhus - Department of Economics
Univ. of Aarhus Dept. of Economics WP 1997-22
Equilibrium allocations in competitive labor market models are independent of whether labor taxes on firms are levied as employment taxes or payroll taxes, for given tax revenue. Turning to non-competitive labor market models, like wage bargaining of efficiency wage models, the two taxes cease to be equivalent in the sense that balanced-budget substitutions of one tax for the other affect equilibrium allocations. However, while more extensive use of payroll taxes always increases equilibrium employment in the wage bargaining model, it may lead to a lower level of equilibrium employment in the efficiency wage model.
Number of Pages in PDF File: 17
JEL Classification: H22, J51
Date posted: December 16, 1997