Taxation and Centralised Wage Setting: The Case of Endogenous Labour Supply

20 Pages Posted: 29 Dec 2005

See all articles by Juha Kilponen

Juha Kilponen

Bank of Finland - Research

Pekka Sinko

Government Institute for Economic Research (VATT)

Abstract

The implications of centralised wage setting for the relationship between taxation, wages and employment are studied allowing for endogenous adjustment in work hours. We show that centralisation promotes wage moderation, makes wages and employment less sensitive to changes in wage taxation and reduces the hours worked. With an individual supply of working hours, a wage tax can even improve employment if wage setting is centralised and marginal utility from a public good is sufficiently high. Moreover, if a profit tax is used to finance public expenditure, higher tax reduces wages and improves employment.

Suggested Citation

Kilponen, Juha and Sinko, Pekka, Taxation and Centralised Wage Setting: The Case of Endogenous Labour Supply. Scottish Journal of Political Economy, Vol. 52, No. 4, pp. 587-606, September 2005. Available at SSRN: https://ssrn.com/abstract=857817 or http://dx.doi.org/10.1111/j.1467-9485.2005.00357.x

Juha Kilponen (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/kilponen_juha/

Pekka Sinko

Government Institute for Economic Research (VATT) ( email )

Arkadiankatu 7
P.O Box 1279
Helsinki, FIN-00531
Finland

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