Taxing wages and sustainable labour market performance: empirical evidence from OECD and EU countries

Abstract

The paper assesses characteristics of labour taxation, employment and unemployment rate in the OECD and in the EU Member States and analyses relationship between tax wedge and labour market outcomes, i.e., employment and unemployment rate. The empirical analysis shows that the non-EU OECD countries are, on average, characterised with lower labour taxation than the EU OECD countries. Moreover, with regard to employment and unemployment rate, OECD and EU Member States can be classified in three groups, by which countries with lower unemployment and higher employment rate have, on average, lower tax wedge at all studied wage levels, and vice versa. The detrimental effect of tax wedge on labour market outcomes was also confirmed by the panel regression analyses performed on the sample of 38 countries over the 2000–2009 period. The empirical findings therefore suggest that policies of further reduction of labour taxation would have a stimulating effect on sustainable labour market performance, especially among...