Prague Economic Papers 2010, 19(4):344-358 | DOI: 10.18267/j.pep.381

Tax Wedge on Labour and its Effect on Employment Growth in the European Union

Primož Dolenc, Suzana Laporšek
UP Faculty of Management Koper, Cankarjeva 5, SI-6104 Koper (primoz.dolenc@fm-kp.si, suzana.laporsek@fm-kp.si).

The paper assesses the characteristics of tax wedge, employment and unemployment rate in the EU and by using linear regression analysis with panel-corrected standard errors on the sample of twenty-seven EU Member States over 1999-2008 period analyzes whether the tax wedge affects the employment growth. The empirical estimates have shown that, with regard to employment and unemployment rate, the EU Member States can be classified into two groups. The first group is characterized with high tax wedge, low employment and high unemployment rate, whereas the second group has the alternative characteristics. The negative tax wedge-employment relation was confirmed in the panel regression analysis, showing that an increase in tax wedge for one percentage point decreases the employment growth in the EU-27 by around 0.04 percentage points, ceteris paribus. The empirical estimates suggest that the EU-27 should continue with the trend of reducing tax wedge, as this would increase employment growth and employment rate and decrease unemployment, especially in Member States with high tax wedge.

Keywords: economic policy, tax wedge, employment growth, EU
JEL classification: H24, J30, J38

Published: January 1, 2010  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
Dolenc, P., & Laporšek, S. (2010). Tax Wedge on Labour and its Effect on Employment Growth in the European Union. Prague Economic Papers, 19(4), 344-358. doi: 10.18267/j.pep.381
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Alesina, A., Perotti, R. (1997), "The Welfare State and Competitiveness." American Economic Review, 87 (5), pp. 921-39.
    2. Alphametrics (2009), Flexicurity: Indicators on the Coverage of Certain Social Protection Benefits for Persons in Flexible Employment in the European Union. Final report. Royston: Alphametrics.
    3. Bassanini, A., Duval, R. (2006), "Employment Patterns in OECD Countries: Reassessing the Role of Policies and Institutions." OECD Economics Department Working Paper No. 486.
    4. Beck, N., Katz J. R. (1995), "What to Do (and Not to Do) with Time-Series Cross-Section Data." American Political Science Review, 89, pp. 634-647. Go to original source...
    5. Behar, A. (2009), "Tax Wedges, Unemployment Benefits and Labour Market Outcomes in the New EU Members." AUCO Czech Economic Review, 3, pp. 71-94.
    6. Belot, M., van Ours, J. C. (2004), "Does the Recent Success of Some OECD Countries in Lowering their Unemployment Rates Lie in the Clever Design of their Labour Market Reforms?" Oxford Economic Papers, 56 (4), pp. 621-42. Go to original source...
    7. Carone, G., Stovicek, K., Pierini, F., Sail, E. (2009), "Recent Reforms of the Tax and Benefit Systems in the Framework of Flexicurity." European Commission - Directorate General for Economic and Financial Affairs Occasional Paper No. 43. Go to original source...
    8. Daveri, F., Tabellini, G. (2000), "Unemployment, Growth and Taxation in Industrial Countries." Economic Policy, 15 (30), pp. 47-104. Go to original source...
    9. Ederveen, S., Thissen, L. (2004), "Can Labor Market Institutions Explain Unemployment Rates in New EU Member States?" European Network of Economic Policy Research Institute Working Paper No. 27.
    10. Elmeskov, J., Martin, J., Scarpetta, S. (1998), "Key Lessons for Labour Market Reforms: Evidence from OECD Countries' Experiences." Swedish Economic Policy Review, 5 (2), pp. 205-52.
    11. European Commission (2005), Integrated Guidelines for Growth and Jobs (2005-2008) including a Commission Recommendation on the Broad Guidelines for the Economic Policies of the Member States and the Community (under Article 99 of the EC Treaty) and a Proposal for a Council Decision on Guidelines for the Employment Policies of the Member States (under Article 128 of the EC Treaty). COM(2005) 141 final. Brussels: European Commission.
    12. European Commission (2009a), Taxation Trends in the European Union - Data for the EU Member States and Norway. Luxembourg: Office for Official Publications of the European Communities.
    13. European Commission (2009b), Employment in Europe 2009. Luxembourg: Office for Official Publications of the European Communities.
    14. European Commission (2009c), Europe in Figures - Eurostat Yearbook 2009. Luxembourg: Office for Official Publications of the European Communities.
    15. European Commission (2010), Cyclical Adjustment of Budget Balances. Luxembourg: Office for Official Publications of the European Communities.
    16. European Employment Observatory (2009), "Quarterly Reports." Birmingham: European Employment Observatory.
    17. Eurostat (2009), "Labour Market." Eurostat, Statistical Database.
    18. Flaig, G., Rottmann, H. (2007), "Labour Market Institutions and the Employment Intensity of Output Growth. An International Comparison." CESifo Working Paper No. 217. Go to original source...
    19. García, J. R., Sala, H. (2006), "The Tax System Incidence on Unemployment: A Country-Specific Analysis for the OECD Economies." The Institute for the Study of Labor Discussion Paper No. 226.
    20. Goerke, L. (1999), "The Wedge." The Institute for the Study of Labor Discussion Paper No. 71.
    21. Góra, M., Radziwiłł, A., Sowa, A., Walewski, M. (2006), Tax Wedge and Skills: Case of Poland in International Perspective. Report No. 64/2006. Warsaw: Center for Social and Economic Research.
    22. Gruber, J. (1997), "The Incidence of Payroll Taxation: Evidence from Chile." Journal of Labor Economics, 15 (3), pp. S72-101. Go to original source...
    23. de Haan, J., Sturm, J. E., Volkerink, B. (2003), "How to Measure the Tax Burden on Labour at the Macro-Level." CESifo Working Paper No. 963. Go to original source...
    24. Koskela, E. (2001), "Labour Taxation and Employment in Trade Union Models: a Partial Survey." Bank of Finland Discussion Papers No. 19/2001. Go to original source...
    25. Koskela, E., Schöb, R. (2007), "How Tax Progression Affect Effort and Employment." The Institute for the Study of Labor Discussion Paper No. 2861. Go to original source...
    26. Kugler, A., Kugler, M. (2003), "The Labor Market Effects of Payroll Taxes in a Middle-Income Country: Evidence from Colombia." The Institute for the Study of Labor Discussion Paper No. 852/2003. Go to original source...
    27. Muysken, I., Van Veen, T., de Regt, E. (1999), "Does a Shift in the Tax Burden Create Employment?." Applied Economics 31, pp. 1195-1205. Go to original source...
    28. Nickell, S., Layard, R. (1999), "Labour Market Institutions and Economic Performance," in Ashenfelter, O., Card, D., ed., Handbook of Labor Economics. Amsterdam: North Holland, pp. 3029-3084. Go to original source...
    29. Nickell, S. (2003), "Employment and Taxes." CESifo Working Paper No. 1109. Go to original source...
    30. OECD (2003), Employment Outlook 2003. Paris: Organization for Economic Cooperation and Development.
    31. OECD (2004), Employment Outlook 2004. Paris: Organization for Economic Cooperation and Development.
    32. OECD (2006), OECD Employment Outlook: Boosting Jobs and Incomes. Paris: Organization for Economic Cooperation and Development.
    33. OECD (2007), Employment Outlook 2007. Paris: Organization for Economic Cooperation and Development.
    34. OECD (2008), Taxing Wages 2007-2008. Paris: Organization for Economic Cooperation and Development.
    35. OECD (2009a), OECD Employment Outlook: Tackling the Job Crisis. Paris: Organization for Economic Cooperation and Development.
    36. OECD (2009b), OECD Reviews of Labour Market and Social Policies: Slovenia. Paris: Organization for Economic Cooperation and Development.
    37. Statistical Office of the Republic of Slovenia (2009), "Rapid Report: Labor Market, No. 9". Ljubljana: Statistical Office of the Republic of Slovenia.
    38. Vodopivec, M. (2005), Income Support for the Unemployed. Issues and Options. Washington, DC: World Bank. Go to original source...
    39. Vodopivec, M. (2006), "Choosing a System of Unemployment Income Support: Guidelines for Developing and Transition Countries." World Bank Research Observer, 21 (1), pp. 49-89. Go to original source...
    40. Vodopivec, M., Wörgötter, A., Dhushyanth, R. (2005), "Unemployment Benefit Systems in Central and Eastern Europe: A Review of the 1990s." Comparative Economic Studies, 47 (4), pp. 615-51. Go to original source...
    41. Võrk, A., Leetmaa, R., Paulus, A., Anspal, S. (2006), "Tax-Benefit System in the New Member States and their Impact on Labour Supply and Employment." PRAXIS Center for Policy Studies Working Paper 29/2006.
    42. World Bank (2005), "Special Topic: Labor Taxes and Employment in the EU-8." World Bank Quaterly Report, April 2005, Part II.

    This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content