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Tax wedge on labor and its effect on employment growth in the European union [Elektronski vir]
Dolenc, Primož, 1976- ; Laporšek, Suzana, 1984-
Higher tax wedge on labor in non-perfectly flexible labor markets reduces employment and therefore increases unemployment. The paper assesses the characteristics of tax wedge, employment and ...unemployment rate in the EU and by using panel regression analysis on the sample of twenty-seven EU Member States over 1999-2008 period analyzes whether the tax wedge affects the employment growth. We find that the average tax wedge of the adult with 67 percent of average earnings in the EU Member States in 2008 amounts 36.5 per cent. The tax wedge decreased in 20 EU Member States in 2008 compared to 1999,but, in general, there is a much stronger decline in average tax wedge NMS than in EU-15. Moreover, we ascertain that with regard to employment and unemployment rate the EU Member States can be classified into two groups. The first group is characterized with high tax wedge, low employment and high unemployment rate, whereas the second group has the alternative characteristics. Furthermore, based on our econometric model we find that the tax wedge reduces the employment growth, especially for high tax wedge group of EU countries. An increase in tax wedge for one percentage point decreases the employment growth in the EU-27 by around 0.10 percentage points. As a policy recommendation we propose that the EU-27 should continue with the trend of reducing tax wedge, as this would, according to our empirical findings, increase employment growth and employment rate and decrease unemployment, especially in Member States with high tax wedge.
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