Progressive taxation and wage setting when unions strategically interact

Abstract

In a multisector economy with unionized labor markets, the interdependence of union wage claims--typical of industrial bargaining--affects the relationship between tax progressivity and wage pressure, which varies in a nonlinear fashion with the nature of the wage bargain, and can be hump-shaped. Our empirical analysis of 20 OECD countries for the period 1997--2004 shows that higher tax progressivity increases pre-tax wages (and unemployment) in countries characterized by industry level wage bargaining, and reduces them in countries with local or fully centralized bargaining. Copyright 2007, Oxford University Press.