|
|
|
|
The Impact of Taxation on Unemployment in OECD Countries
By Bernhard Heitger
Introduction
There have been numerous studies of the impact of labor market rigidities on unemployment rates. The general conclusion for both OECD as well as other countries is that rigidities explain a significant part of the observed international variation in unemployment rates (Layard, Nickell, and Jackman 1991).
The primary interest of the present paper is the impact of taxation on unemployment in OECD countries. The relation between unemployment and taxation has recently attracted special attention. For example, Nickell (1997) has found that taxation is a significant factor in explaining differences in unemployment rates across countries (see also Scarpetta 1996; Nickell and Layard 1997; Heitger 1998; and Elmeskov, Martin, and Scarpetta 1998). Since high unemployment rates may lead to higher government expenditures and taxes, the question is whether the impact of the tax burden on unemployment has been estimated correctly—that is, whether the estimates are consistent and unbiased.
To evaluate the "true" impact of taxation on unemployment, Hausman specification tests can be carried out (Hausman 1978). With the help of these tests it is possible to investigate whether the impact of the tax burden on unemployment is exogenous. If the outcome is that the null hypothesis (that taxes are exogenous) has to be rejected, a two-stage least squares estimation procedure can provide unbiased and consistent estimates of the tax burden's impact on unemployment and thus correct for the simultaneity bias.
Full Text (PDF, 22 pages, 94 KB)