Market adjustments to tax evasion alter factor
and product prices, which determine the true impacts and beneficiaries of
How does tax evasion affect the distribution of
income? In the standard analysis of tax evasion, all the benefits are
assumed to accrue to tax evaders. However, tax evasion has other impacts
that determine its true effects. As factors of production move from
tax-compliant to tax-evading (informal) sectors, these market adjustments
generate changes in relative prices of products and factors, thereby
affecting what consumers pay and what workers earn. As a result, at least
some of the gains from evasion are shifted to consumers of goods produced by
tax evaders, and at least some of the returns to tax evaders are competed
away via lower wages.
Unemployment insurance generosity should be
greater when unemployment is high—and vice versa
High unemployment and its social and economic
consequences have lent urgency to the question of how to improve
unemployment insurance in bad times without jeopardizing incentives to work
or public finances in the medium term. A possible solution is a rule-based
system that improves the generosity of unemployment insurance (replacement
rate, benefit duration, eligibility conditions) when unemployment is high
and reduces the generosity when it is low.
The type, quality, and quantity of
entrepreneurship are influenced significantly by corporate income
taxes—though only slightly
Corporate income taxation influences the
quantity and type of entrepreneurship, which in turn affects economic
development. Empirical evidence shows that higher corporate income tax rates
reduce business density and entrepreneurship entry rates and increase the
capital size of new firms. The progressivity of tax rates increases
entrepreneurship entry rates, whereas highly complex tax codes reduce them.
Policymakers should understand the effects and underlying mechanisms that
determine how corporate income taxation influences entrepreneurship in order
to provide a favorable business environment.
When applied to the most responsive segments of
the labor market, tax policy can increase lifetime earnings and
With aging populations and increased demands on
government revenue, countries need to boost employment and earnings. Tax
policy should focus on labor market entry and retirement. Those are the
points where labor supply is most responsive to tax incentives, which can
enhance the flow into work of people leaving school and women with young
children and can prolong employment among older workers. Human capital
policy has a complementary role in improving the payoff to work and ensuring
that earnings hold up longer over a lifetime.
Two-tier wage bargaining fails to link wages
more closely to productivity and increases allocative inefficiencies
Debate over labor market flexibility focuses
mainly on firing costs, while largely ignoring wage determination and the
need for collective bargaining reform. Most countries affected by the euro
debt crisis have two-tier bargaining structures in which plant-level
bargaining supplements national or industrywide (multi-employer) agreements,
taking the pay agreement established at the multi-employer level as a floor.
Two-tier structures were intended to link pay more closely to productivity
and to allow wages to adjust downward during economic downturns, while
preventing excessive earning dispersion. However, these structures seem to
fail precisely on these grounds.
Keeping older workers in the workforce longer
not only doesn’t harm the employment of younger workers, but might actually
The fiscal sustainability of state pensions is
a central concern of policymakers in nearly every advanced economy.
Policymakers have attempted to ensure the sustainability of these programs
in recent decades by raising retirement ages. However, there are concerns
that keeping older workers in the workforce for longer might have negative
consequences for younger workers. Since youth unemployment is a pressing
problem throughout advanced and developing countries, it is important to
consider the impact of these policies on the employment prospects of the
Wage subsidies to encourage employers to hire
older workers are often ineffective
Population aging in many developed countries has
motivated some governments to provide wage subsidies to employers for hiring
or retaining older workers. The subsidies are intended to compensate for the
gap between the pay and productivity of older workers, which may discourage
their hiring. A number of empirical studies have investigated how wage
subsidies influence employers’ hiring and employment decisions and whether
the subsidies are likely to be efficient. To which groups subsidies should
be targeted and how the wage subsidy programs interact with incentives for
early retirement are open questions.
Policies to tackle wage inequality should focus
on skills alongside reform of labor market institutions
Policymakers in many OECD countries are
increasingly concerned about high and rising inequality. Much of the
evidence (as far back as Adam Smith’s The Wealth of
Nations) points to the importance of skills in tackling wage
inequality. Yet a recent strand of the research argues that (cognitive)
skills explain little of the cross-country differences in wage inequality.
Does this challenge the received wisdom on the relationship between skills
and wage inequality? No, because this recent research fails to account for
the fact that the price of skill (and thus wage inequality) is determined to
a large extent by the match of skill supply and demand.