|
In discussion paper No 1298, Research Fellow Gilles Saint-Paul develops a simple model to study how relative wage rigidity affects equilibrium taxation. He assumes workers have different skills which enter as complements in the production function. People vote about two things: first, `labour market institutions', which essentially means a certain degree of relative wage rigidity across skills; second, they vote on `fiscal policy', which is a simple system of redistributive taxation.The author also assumes that `labour market institutions' are more sluggish, i.e. more costly to remove, than fiscal policy. 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. Labour Market Institutions and the Cohesion of the Middle Class |
|