DP1298 Labour Market Institutions and the Cohesion of the Middle Class

Author(s): Gilles Saint-Paul
Publication Date: November 1995
Keyword(s): Income Distribution, Social Cohesion, Taxation, Unemployment, Wage Rigidity
JEL(s): E24, E62, E64, H2, J3
Programme Areas: International Macroeconomics, Human Resources
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1298

We develop a simple model to study how relative wage rigidity affects equilibrium taxation. It is argued that relative wage rigidity, by compressing incomes within the middle class, leads to a lower degree of redistributive conflict within the politically important core of society, even though income inequality may increase for society as a whole. In the model, people vote first on wage rigidity and second on redistributive taxation. The rigid society has a lower tax rate than the flexible one. it is supported by the 'middle-class' in the first stage, while the poor, the rich and the unemployed suffer from it.