We study the empirical relationship between labor taxation and pretax wages in Italy. We find that higher tax … progressivity increases pretax wages. To explain this result, we introduce in an informal way a relative wage effect and argue that … employment. The evidence on the effect of the average income tax rate on pretax wages is more mixed, but it also points to the …

abatement of pollution. A decline in average labor taxes reduces unemployment if it generates lower pretax wages. Pretax wages … replacement ratio, and unions are willing to accept lower pretax wages because the net income loss from employment increases … progressivity. Economic theory suggests that higher progressivity could reduce unemployment. Suppose that wages are bargained over …