The Effects of Tax Wedges on Hours Worked and Unemployment in Sweden

25 Pages Posted: 15 Feb 2006

See all articles by Alun H. Thomas

Alun H. Thomas

International Monetary Fund (IMF) - European Department

Date Written: October 1998

Abstract

The paper investigates the relationship between labor taxation and unemployment in Sweden by estimating a labor market model that includes a wage-setting locus and labor demand and supply relationships. The study simulates the effect of a 1 percentage point increase in the payroll tax and in total tax rates. The increase in the payroll tax pushes up labor costs by about ½ percent over a 5-10 year time horizon. Hours worked fall by 0.5 percent and the unemployment rate rises by 0.3 percentage point. The increase in total tax rates generates a similar result. Therefore, it appears that increases in taxes have adversely affected employment and unemployment in Sweden.

Keywords: payroll taxes, total labor taxes, labor cost, employment, unemployment

JEL Classification: J3

Suggested Citation

Thomas, Alun, The Effects of Tax Wedges on Hours Worked and Unemployment in Sweden (October 1998). IMF Working Paper No. 98/152, Available at SSRN: https://ssrn.com/abstract=882729

Alun Thomas (Contact Author)

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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