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Taxes on employment income can affect the demand for labour as a result of the ''tax wedge'' that is driven between he cost of labour to employers and the net payment received by employees. The magnitude of the effect upon unemployment depends upon the ''price flexibility'' in the relevant labour market, because it depends upon the extent to which employees seek to pass a tax increase on to their employers <ref>Daveri and Tabellini: ''Unemployment and Taxes: Do taxes affect the rate of unemployment?'', Economic Policy Vol. 15 Issue 30, 2000</ref> | Taxes on employment income can affect the demand for labour as a result of the ''tax wedge'' that is driven between he cost of labour to employers and the net payment received by employees. The magnitude of the effect upon unemployment depends upon the ''price flexibility'' in the relevant labour market, because it depends upon the extent to which employees seek to pass a tax increase on to their employers <ref>Daveri and Tabellini: ''Unemployment and Taxes: Do taxes affect the rate of unemployment?'', Economic Policy Vol. 15 Issue 30, 2000</ref> | ||
Taxes on employment income can affect the supply of labour as a result both of its ''price effect'' - to the extent that it makes employees try to compensate for their loss of after-tax earnings - and its ''substitution effect'' - to the extent that it makes employees willing to sacrifice their reduced net earnings in exchange for the unchanged the benefits of increased leisure. Empirical evidence tends to indicate that the effect is larger for female labour than for male labour and that it is greater for both when tax rates are progressive. The combined influence of employment income taxation and ''means-tested '' state benefits can also affect the supply of labour as a result of the operation of the ''unemployment and poverty traps''. | Taxes on employment income can affect the supply of labour as a result both of its ''price effect'' - to the extent that it makes employees try to compensate for their loss of after-tax earnings - and its ''substitution effect'' - to the extent that it makes employees willing to sacrifice their reduced net earnings in exchange for the unchanged the benefits of increased leisure. Empirical evidence tends to indicate that it has a negative effect the effect that is larger for female labour than for male labour and that it is greater for both when tax rates are progressive<ref>[http://www.ifs.org.uk/mirrleesreview/reports/labour_supply.pdf Costas Meghir and David Phillips: ''Labour Supply and Taxes'', Institute for Fiscal Studies, 2008]</ref>. The combined influence of employment income taxation and ''means-tested '' state benefits can also affect the supply of labour as a result of the operation of the ''unemployment and poverty traps''. | ||
Revision as of 06:23, 9 November 2009
Taxes on employment income can affect the demand for labour as a result of the tax wedge that is driven between he cost of labour to employers and the net payment received by employees. The magnitude of the effect upon unemployment depends upon the price flexibility in the relevant labour market, because it depends upon the extent to which employees seek to pass a tax increase on to their employers [1]
Taxes on employment income can affect the supply of labour as a result both of its price effect - to the extent that it makes employees try to compensate for their loss of after-tax earnings - and its substitution effect - to the extent that it makes employees willing to sacrifice their reduced net earnings in exchange for the unchanged the benefits of increased leisure. Empirical evidence tends to indicate that it has a negative effect the effect that is larger for female labour than for male labour and that it is greater for both when tax rates are progressive[2]. The combined influence of employment income taxation and means-tested state benefits can also affect the supply of labour as a result of the operation of the unemployment and poverty traps.
- ↑ Daveri and Tabellini: Unemployment and Taxes: Do taxes affect the rate of unemployment?, Economic Policy Vol. 15 Issue 30, 2000
- ↑ Costas Meghir and David Phillips: Labour Supply and Taxes, Institute for Fiscal Studies, 2008