Wage Determination under Non-linear Taxes: Estimation and an Application to Panel Data.

This paper studies wage determination under piecewise linear taxes in a unionized labor market. The purpose of the paper is to model how piecewise linear taxation affects the choice set of the union and to take this information into account in the estimation. The empirical application is based on panel data. Piecewise linear taxes necessitates formal assumptions about the sources of randomness, and the authors find that both unobserved heterogeneity and measurement errors in the wage rate are important to consider in the estimation. The authors also find that taxes are likely to have a nonnegligible impact on the (pre-tax) wage rate. Copyright 1997 by Royal Economic Society.