Labour Taxation, Tax Progression and Job Matching - Comparative Alternative Models of Wage Setting

In this paper we consider the effects of labour taxation on wages, unemployment and efficiency in a job matching framework. We derive labour market equilibrium with taxes in a model of endogenous job creation and job destruction under three alternative hypothesis of wage formation: Nash bargain, monopoly union and efficiency wages. We find that labour taxes harm employment irrespective of the wage formation mechanism. However, employment turns out to be much less sensitive to taxation in the models involving wage bargaining. Our results also suggest that increased progression in labour taxation may improve employment with low or even non-existent efficiency cost if wages are set in a bargaining framework.