Fiscal Policies and the Prices of Labor: A Comparison of the U.K. and U.S.

Abstract

This paper measures the 2007-13 evolution of employment tax rates in the U.K. and the U.S., especially as they are influenced by changes in tax and safety net benefit rules. The magnitudes of the U.S. changes are greater, in the direction of taxing a greater fraction of the value created by employment, and primarily achieved with changes in implicit tax rates. Even though both countries implemented temporary “fiscal stimulus,” their tax rate dynamics were different: the U.S. stimulus increased rates whereas the U.K. stimulus reduced them. The U.K. later increased the tax on employment during its so-called “austerity” period. Employer-cost dynamics are also different in the two countries. The tax rates calculated in this paper are a first ingredient for cross-country comparisons of labor market and fiscal policy dynamics during and after the financial crisis.