Taxes on Labour, Effciency Wages,and Union Bargaining

This paper studies the impact of labour taxation in a shirking model with wage bargaining.It is shown that if the ratio of unemployment compensation to the net-of-tax wage iskept fixed a tax cut leads to higher unemployment. When the unemployment benefitsreplacement ratio is allowed to change, whether by keeping benefits fixed in real termsor by imposing a budget constraint on the unemployment insurance scheme, the effect ofa tax cut on unemployment is ambiguous. Adverse employment effects are ruled out ifunions are powerless or the labor share is constant....