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Oxford Economic Papers Advance Access originally published online on November 28, 2006
Oxford Economic Papers 2007 59(1):127-140; doi:10.1093/oep/gpl027
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© Oxford University Press 2006 All rights reserved

Progressive taxation and wage setting when unions strategically interact

Giorgio Brunello* and Daniela Sonedda{dagger}

*Department of Economics, University of Padova, via del Santo 33, 35100 Padova, Italy
{dagger}University of Piemonte Orientale

Correspondence: e-mail: giorgio.brunello{at}unipd.it


  Abstract

In a multisector economy with unionized labor markets, the interdependence of union wage claims—typical of industrial bargaining—affects the relationship between tax progressivity and wage pressure, which varies in a nonlinear fashion with the nature of the wage bargain, and can be hump-shaped. Our empirical analysis of 20 OECD countries for the period 1997–2004 shows that higher tax progressivity increases pre-tax wages (and unemployment) in countries characterized by industry level wage bargaining, and reduces them in countries with local or fully centralized bargaining.

Key Words: JEL classifications: H24


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