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Optimal Taxation in a Unionised Economy

Author

Listed:
  • Vidar Christiansen
  • Ray Rees

Abstract

Unions appear to have an aversion to wage disparities among their members, leading to wage compression. This paper analyses the consequences of this for income tax policy. In a two-sector general equilibrium model we highlight the tradeoff between correcting the resource misallocation created by wage compression and the government’s distributional objectives. Where the union’s aversion to wage dispersion is strong, tax policy can do little to correct the distortion in the supply of trained labour, though it can come closer to achieving distributional aims. Where wage compression is less pronounced, tax policy can have significant effects on resource misallocation, at the expense of its distributional goals.

Suggested Citation

  • Vidar Christiansen & Ray Rees, 2018. "Optimal Taxation in a Unionised Economy," CESifo Working Paper Series 6954, CESifo.
    • Handle: RePEc:ces:ceswps:_6954
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp6954.pdf
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    References listed on IDEAS

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    1. Thomas Aronsson & Tomas Sjögren, 2004. "Is the Optimal Labor Income Tax Progressive in a Unionized Economy?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 661-675, December.
    2. Lee, David & Saez, Emmanuel, 2012. "Optimal minimum wage policy in competitive labor markets," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 739-749.
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    4. Allen, Franklin, 1982. "Optimal linear income taxation with general equilibrium effects on wages," Journal of Public Economics, Elsevier, vol. 17(2), pages 135-143, March.
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    7. David S. Lee & Emmanuel Saez, 2008. "Optimal Minimum Wage Policy in Competitive Labor Markets," Working Papers 1105, Princeton University, Department of Economics, Industrial Relations Section..
    8. Sébastien Jean & Giuseppe Nicoletti, 2004. "Regulation and Wage Premia," Working Papers 2004-12, CEPII research center.
    9. Barth, Erling & Moene, Karl O. & Willumsen, Fredrik, 2014. "The Scandinavian model—An interpretation," Journal of Public Economics, Elsevier, vol. 117(C), pages 60-72.
    10. Nymoen, Ragnar & Rodseth, Asbjorn, 2003. "Explaining unemployment: some lessons from Nordic wage formation," Labour Economics, Elsevier, vol. 10(1), pages 1-29, February.
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    12. repec:pri:cepsud:178lee is not listed on IDEAS
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    Citations

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    Cited by:

    1. Gustafsson, Johan & Sjögren, Tomas, 2024. "Can Labor Market Imperfections Motivate the Implementation of an Income-Based Pension System?," Umeå Economic Studies 1024, Umeå University, Department of Economics.
    2. Albert Jan Hummel & Bas Jacobs, 2018. "Optimal Income Taxation in Unionized Labor Markets," Tinbergen Institute Discussion Papers 18-064/VI, Tinbergen Institute.
    3. Hummel, Albert Jan & Jacobs, Bas, 2023. "Optimal income taxation in unionized labor markets," Journal of Public Economics, Elsevier, vol. 220(C).

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    More about this item

    Keywords

    income taxation; optimal taxation; unionized economy; wage compression;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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