JOURNAL ARTICLE
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Steuerprogression und Arbeitslosigkeit
Journal of Contextual Economics – Schmollers Jahrbuch, Vol. 117 (1997), Iss. 4 : pp. 567–584
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Fuest, Clemens
Huber, Bernd
Abstract
This paper discusses the effect of changes in the progressivity of labour income taxes on wage setting and employment. In competitive labour markets, tax progression reduces employment. However, for unionised labour markets, recent contributions argue that tax progression paradoxically enhances employment; according to this result, a tax reform which reduces progression, as the one planned by the German government, would tend to reduce employment. We show that this result critically depends on the assumption that bargaining is restricted to the wage rate. In our model, where bargaining over both wages and individual working time is allowed for, it turns out that a progressivity reducing tax reform would moderate union wage demands, raise employment and output, and induce unions to raise individual working time.