On the Dynamics of Unemployment and Labor Tax Progression: The Case of Italy 1974-1995

This paper presents some empirical evidence for Italy from 1974 to 1995 on the relationship between the dynamics of unemployment and tax progressivity. To this purpose, the econometric tool is a Bayesian numerical approach based on a three-equation vector autoregression model where the unemployment effects are derived residually from the difference between employment and labor-force participation effects. By simultaneously estimating the labor market effects of changes in labor taxes, the current analysis points to the importance of the supply side of the labor market from a macroeconomic perspective and empirically supports the view that either the individual´s or the aggregate labor participation decisions have to be taken explicitly into account when evaluating whether or not tax progressivity is a useful policy device against unemployment.