Tax Wedge on Labour and its Effect on Employment Growth in the European Union

The paper assesses the characteristics of tax wedge, employment and unemployment rate in the EU and by using linear regression analysis with panel-corrected standard errors on the sample of twenty-seven EU Member States over 1999-2008 period analyzes whether the tax wedge affects the employment growth. The empirical estimates have shown 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. The negative tax wedge-employment relation was confirmed in the panel regression analysis, showing that an increase in tax wedge for one percentage point decreases the employment growth in the EU-27 by around 0.04 percentage points, ceteris paribus. The empirical estimates suggest that the EU-27 should continue with the trend of reducing tax wedge, as this would increase employment growth and employment rate and decrease unemployment, especially in Member States with high tax wedge.