Ben Lockwood

Wage setting and the tax system theory and evidence for the United Kingdom

Abstract This paper analyses the effects of a non-linear tax system on wage bargaining. The main conclusions are: an increase in the marginal income or payroll tax rate reduces the pre-tax wage; in the isoelastic case, an increase in the average tax rate increases the pre-tax wage by more than the tax increase, and a measure of the progressivity of the tax system (residual income progression) is a sufficient measure of the effect of the tax system on wage pressure. Empirical evidence is presented to support these propositions, and the predictions of the model regarding the effect of recent changes to the U.K. tax system on the distribution of earnings discussed.

Information Externalities in the Labour Market and the Duration of Unemployment

A matching model is analysed in which firms imperfectly test workers prior to hiring them. If (some) firms hire only workers who pass the test, there is an informational externality; unemployment duration is a signal of productivity. In equilibrium, if it is profitable for a firm to test, it is also profitable for it to condition its hiring decision on duration, hiring those whose duration is less than a critical value. This testing equilibrium is inefficient, with too much testing and too low a critical duration value. Sensitivity analysis of the latter suggests explanations for the dependence of re-employment probabilities on duration and the instability of the U-V curve.

Inter-regional insurance

This paper considers the problem facing a central government which can transfer resources between regional governments by use of intergovernmental grants. Regions provide a public good and are subject to privately observed shocks either to income, or demand for, or cost of, the public good. There may be public good spillovers between regions. In this set-up, central government has an insurance role, and possibly also a role as co-ordinator of regional public good provision. When grants are chosen to maximise regional expected utility, notatble results are; (i) depending on the source of the shock, the grant may induce over- or undersupply of the public good relative to the Samuelson rule; (ii) with asymmetric information, and with spollovers, there is a two way distortion of public good supply - that is, qualitatively different distortions (relative to the Samuelson rule) at different points in the support of the distribution of the shock; (iii) with symmetric information, the optimal grant is always linear in the public good, but with asymmetric information, the grant will have a quasi-concave or quasi-convex, rather than an constant slope, depending on the source of the shock.

Tax competition and tax co-ordination under destination and origin principles: a synthesis

This paper proposes a general framework for analysing commodity tax competition under destination and origin principles, based on three possible tax spillovers, the consumer price spillover, the producer price/terms of trade spillover, and rent spillovers. A model is presented which can be extended to accommodate all three spillovers. Using this model, many of the results in the existing literature can be derived, compared, and extended.

Commodity Tax Competition Under Destination and Origin Principles

This paper studies the effect of switching from the destination to the origin principle of taxation on non-cooperative commodity tax equilibrium. When taxes are constrained to uniformity across commodities, the switch has no effect. When differentiated taxes are allowed, the effects of the switch depend on whether countries are small or large. In both cases the switch imposes the requirement that taxes must be uniform across commodities within each country. In the second case there are two further effects of the switch: (i) the introduction of negative spillover effects from tax policy; and (ii) a change in incentives to manipulate the terms of trade. The switch does not necessarily lead to a fall in all tax rates.

When are origin and destination regimes equivalent

A series of equivalence results are established which show that a switch from a destination regime of commodity taxation to an origin regime has no real effects. These significantly generalize those in the existing literature. Assuming uniformity of taxes within each country, equivalence applies (1) in a general competitive economy with an arbitrary (finite) number of goods and factors of production, arbitrary factor taxes, and arbitrary transport costs; (2) in an imperfectly competitive economy with any form of imperfect competition and with transport costs; and (3) in monetary economies where there is some price rigidity (such as nominal wage rigidity) as long as the exchange rate is flexible. Conditions under which nonequivalence applies are also identified and discussed.

Designing Monetary Policy when Unemployment Persists

This paper investigates how unemployment persistence affects the optimal delegation of monetary policy to an independent central banker (CB). Two opposing forces are shown to be at work: with more persistence, the governments incentive to stabilize the economy is greater; but (if the CB is forward-looking) its incentive to create inflation surprises is also greater. The authors show that, owing to the second effect, the government may wish not to delegate at all, unlike the case where there is no persistence. In the event that the government does delegate, the paper identifies conditions under which either effect dominates in the governments choice of conservatism of the CB. The authors compare delegation to discretion and precommitment, using a diagrammatic approach that may be of independent interest. They also present some preliminary empirical evidence on the cross-country relationship between unemployment persistence and inflation that appears consistent with the models predictions. Copyright 1998 by The London School of Economics and Political Science

Trade Unions, Non-Binding Wage Agreements, and Capital Accumulation

This paper provides a counterexample to some recent results of Grout (1984) which state that in a bargaining situation without binding wage agreements, the capital stock will be biased downwards. In a general equilibrium setting, this result may be reversed. The argument is built around a simple Diamond-type overlapping generations model where the young work and old own both capital and shares in firms. A move from binding to non-binding wage contracts may increase the capital stock in this environment. A rise in trade-union power will generally increase the capital stock and reduce the speed of the economys adjustment.

Did the single market cause competition in excise taxes? Evidence from EU countries

Tax competition theory predicts that the introduction of the EU Single Market in 1993 should have caused excise tax competition and thus increased strategic interaction in the setting of excise taxes among EU countries. We test this prediction using a panel data set of 12 EU countries over the period 1987–2004. We find that for excise duties on still and sparkling wine, beer and ethyl alcohol, strategic interaction significantly increased after 1993. There is weaker evidence of increased interaction in cigarette taxes, possibly because cigarettes are widely smuggled, giving rise to tax competition even before the Single Market.

Bailouts in Federations: Is a Hard Budget Constraint Always Best?

This article analyses hard and soft budget constraints in a federation, where there is a moral hazard problem between the central and the regional governments. Regional governments can avoid a bailout from the center by exerting costly effort. In this setting, a hard budget constraint is not always optimal because it can provide excessive incentives for high effort, and thus discourage investment that is socially efficient. Thus, a hard budget constraint can imply the opposite kind of inefficiency that emerges under a soft budget constraint, where the common pool problem can give rise to inefficiently low effort and overinvestment.