Abstract
In this paper we empirically test the importance and the effects of labour taxation on employment in Croatia. The motivation for this analytical inquiry stems from the fact that Croatia is one of the countries with the lowest employment rates in the European Union while at the same time it has relatively high labour tax burden compared to peers and ranks among the countries with most negative perceived effects of taxation on incentives to work. As fiscal policy is the main economic policy instrument in Croatia, it is important to analyse whether fiscal measures can directly affect labour market performance. Our results show that tax policy has significant effect on employment in Croatia which has important policy implications.
Highlights
Croatia ranks near the bottom of the European Union countries with respect to employment rate
In this context it is important to emphasise that there are various papers indicating that labour taxation in Croatia is relatively excessive and/or that there is still room for additional reduction of tax burden which would be beneficial for labour market
In this paper we focus on the effect of labour taxation, so based on Equation 5 we can conclude that increase of labour taxes has negative effects on the level of employment in an imperfect labour market
Summary
Croatia ranks near the bottom of the European Union countries with respect to employment rate (percentage of labour force that is employed). Countries with higher tax burden on labour tend to have lower employment rates as reservation wages are higher and people are less motivated to enter employment (income–leisure trade off). In this context it is important to emphasise that there are various papers indicating that labour taxation in Croatia is relatively excessive and/or that there is still room for additional reduction of tax burden which would be beneficial for labour market. Blažić and Trošelj (2012) warn that adjusted methodology in tax wedge calculation puts Croatia lower on the scale (which was confirmed in papers presented in Urban (2016)), but that this shouldn’t discourage policy makers to continue to reduce labour taxation. The paper ends with the Conclusion where we emphasise policy implications based on the results
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