Taxes and Unemployment: Collective Bargaining and Efficiency Wage Models

Unemployment remains a major problem for economic policy at the beginning of the millennium. Taxes and Unemployment investigates how tax policy affects labor market outcomes in industrialized countries and to what extent it can be used to combat unemployment. In particular, the wage and employment consequences of tax rate variations, the impact of changes in tax progression and of comprehensive tax reforms are analyzed. It is shown that the employment effects of tax policy depend crucially on the institutional features of the labor market. These features are often country-specific and include the strength of collective bargaining institutions relative to other mechanisms of wage determination, the tax treatment of the jobless, the legal incidence of taxes and the exact specification of the tax system. Therefore, Taxes andUnemployment advocates an approach to reducing unemployment which is tailored to the specific characteristics of labor markets. Moreover, the analysis indicates that tax reforms need to be supported by other policy measures to regain full employment.