Europe, Financial sector, fiscal policy, Labor Market Policy, Labor market, social policy and social services, public finance, Research, Social Security and Public Pensions

Study on the effects and incidence of labour taxation


Project description:

In the context of European Semester many Member States have received recommendations to reform their tax system to become more growth-friendly by reducing labour taxes on specific groups or shifting the tax burden away from labour to tax bases linked to consumption, property, and combatting pollution. Until now, the policy recommendation on the shift of labour taxes are general without specifying whether a Member State should reduce the labour taxes on employers or on employees to alleviate the specific problems in their labour markets. In the context of the difficult economic circumstances and budget constraints, it is important to pursue only well targeted tax reforms.

General Objectives of the Project:

Objectives of the study are:
1.    to present indicators used in the literature to identify whether unemployment is due mainly to labour demand or labour supply issues;
2.    to provide estimates for the short-term and long-term incidence of employer - and employee -side labour taxes;
3.    to identify and analyse the factors (labour market regulation and institutions, wage setting procedures etc.) which determine the effect of labour taxation on employment outcomes in the EU Member States and across groups of workers;
4.    to derive from the above analysis a framework to identify tax-related employment problems and the estimated efficiency of tax measures to fix these problems.

Project Structure and Involvement of CASE:

Project is divided into the following tasks:
1.    Review of the sources of employment problems
2.    Review of the tax incidence on labour
3.    Review of the interplay between labour market institutions/regulations and labour taxation
4.    Framework with indicators to identify the role of labour taxation in causing and solving employment problems
5.    Own empirical analysis

CASE is responsible for implementation of task1, which is divided into the two sub-tasks: (1) review of key literature – through desk-research to identify labour demand and supply factors influencing employment; (2) presentation of indicators that reflect sources of employment problems.

Project Output:

1.    Literature review on the economic and social trends affecting labour market outcomes in the EU.
2.    Presentation of indicators that reflect sources of employment problems.
3.    Overview of the economic literature on the short-term and long-term economic incidence of employer and employee social security contributions and labour taxes ((i) studies that directly address the question of economic incidence of labour taxation and social security contributions; (ii) broader economic literature on the incidence of labour taxation (iii) literature which analyses the economic incidence using computable general equilibrium (CGE) models).
4.    Review of the literature on the economic incidence of labour taxes and the review of the literature on labour supply and demand elasticities as important determinants of economic incidence put into the context of labour market institutions and the broader economic environment. Special focus of the task is on wage setting process and the welfare system.
5.    NiGEM, a dynamic macro-econometric model, which tracks the behaviour of households and illustrates the quantitative incidence of labour taxes by simulating the outcomes of a reform, which shifts pension contributions from employers to employees.
6.    Developped framework which allows identifying the scope of labour taxation reforms to improve the labour market outcomes in the different Member States.
Project activities include: participation in the kick-off, interim and final meetings; preparation of methodological, interim and final reports.

Sponsor: EC DG TAXUD

Partners:  IHS (Project leader), CPB (FWC leader), IFS, ETLA, CAPP.