Fiscal Norming of Wages to Promote Employment with Monopoly Unions

The paper analyses how a firm-level tax (or subsidy) calculated on the average wage relative to a pre-set norm may promote employment. We assume a monopoly union setting wages at the firm level to maximize that part of the wage bill exceeding the reservation wage. The fiscal device affects union perception of labour demand and induces it to quote a lower wage and obtain a higher corresponding level of employment. Empirical tests are performed over a sample of 43 Polish firms in 1990 and 1991. They support our model assumptions as well as the ‘employment-enhancing’ effect of the tax in Polish firms.