This got me wondering. Are the high taxes that exist in many European countries really to blame for the high unemployment rates there? Or are the Western European tax rates and unemployment rates just coincidental?
Leaving aside argument by assertion, there are emperical econometric analyses of this issue. Afraid I do not have the cites on hand, I ran across the coverage in the Economist’s Financial section. Shall have to look this up.
As I recall, the econometric tests were inconclusive to negative in re a causal relationship between “high taxes”(*) per se and unemployment.
Again, as I recall, a stronger relationship was found between what authors judged to be labor market rigidities (laws making hiring and firing relatively expensive, long and high levels of unemployment benefits -e.g. 90% of salary indefinately, rigid work licensing laws.).
I suggest that for the discussion to move forward then, that we rely on the actual emperical literature(**) in re the EU, which is extensive, rather than simplistic assertions from either side of the hypothetical fence. Not that given the starting reference, I have but the dimmest hope this will be the case.
(*: high taxes being a subjective term)
(**: rely on emperical literature to be understood as not 3rd hand partisan characterizations such as editorials in the WSJ, although decent balanced overviews in sources as FT and Economist strike me as worthy.)
Probably not, at least in the long run. Unemployment is a failure of the labour market to clear. Taxes on business may affect the amount of labour supplied if they are passed back in the form of lower wages, but in the long run they don’t affect whether the market clears. Some economists (e.g. Phelps) would dispute this, claiming that the non-shirking condition of an efficiency wage labour market is asymmetically affected by payroll taxes, but this in general can be sheeted home as either a short-run phenomenon or as an unjustifiable asymmetry in icidence assumptions.
High tax rates do affect the amount of employment (by how much it is unclear). But they do not prevent the market clearing at that lower level. Unemployment is due to nominal rigidities, which are institutional in nature.
December’s above post being the case in point for what I suggest avoiding, simplistic post-hoc ergo prompter hoc reasoning.
(I note, for example, Scandanavia showed both high rates of growth and high tax rates and low unemployment rates through to roughly the 1980s. Simplistic associations will allow one to make a counter argument to december’s simplistic argument above. Both are wrong, this is a matter of carefull econometric analysis as causation in re unemployment levels is complex. )
It isn’t the taxes themselves (directly) that necessarily cause high unemployment (though taxes can certainly reduce what society otherwise might have produced, and it’s hard to say what might happen had they not been there). European bussiness also used to have all sorts of regulations that prevent you from firing workers, and demand very generous cmopensation and benefits. This makes hiring new people a lot less attractive than it otherwise might be. Europe (particlarly France) also has such great unemployment benefits (compared to the U.S.) that there’s not anywhere near the same pressure to get off them. The result is those who have jobs are very happy to have them, but the bussinesses certainly aren’t eager to add more super expensive, potentially unfirable labor. And those that don’t have jobs aren’t all that upset about not having them. Hence, high unemployment. That’s the theory of many economists at least. Europeans (particualrly the French) used to blame rather implausible things like “globilization” for all their woes.
Of course, having unemployment is not necessarily a BAD thing. Unemployment can be associated with bad things, sure, but it’s not so inherently. I mean, being unemployed is what many people might aspire to if not for its correlation with a reduction of income. Compared to workers of 100 years ago, we are all seriously unemployed: working far fewer hours of the day: that doesn’t mean we’re worse off. You might like living in Europe’s system if you don’t mind the higher likihood of being unemployed… but not having that be so bad either.
Collounsbury, you were quick to take a shot at my post. In that sense, your post hack was a prompter hack.. However, the phrase you wanted was * post-hoc ergo propter hoc*.
I can well believe that labor market rigidities might play an even larger role than high taxes in causing unemployment. Still, the Law of Supply and Demand implies that higher tax rates will reduce employment. The question is, by how much?.
hawthorne, I am unfamiliar with the concept of a market “clearing.” Can you explain it?
Tax rates are but one factor in a rather large complex of interactive factors that will determine a given economy’s unemployment.
If we are drawing a chart as it relates to unemployment and plotting the efficient frontier for tax rates, than any rise in tax rates while the rate is below the efficient frontier will be beneficial to the economy in general, and (all other things equal) should serve to move unemployment towards its full employment value if it has any effect (and that could be either up or down.)
If tax rates are above the efficient frontier, than any rise in tax rates from that point should serve to tend to increase unemployment(if it has any effect) regardless of its relative postion to the full employment figure.
I deny any knowledge of the M. As for the early comment, well you’re so predictable it is painful.
The question how much is an emperical question. Law of supply and demand does not assert a necessary relationship btw higher taxes and higher unemployment, as explained above by others.
You’re, as your habit, short circuiting the discussion by simply assuming the consequent and trying to run with it from there. Please don’t - as usual you’re going to ruin a perfectly good discussion with yet more nattering on w/o regard to logical exopsition, argument and fact based analisys to engage in all-too-typical ideological posturing.
Market clearing means simply the market functioning adequately such that supply and demand are able to balance, that buyers and sellers are able to come together adequately.
See International Economics Glossary: M for a decent expositionn of this and other technical terms. (Others that may be confusing are efficiency wage etc.)
There are by the way a number of factors why a simple Supply x Demand model is utterly inappropriate for this question, such as efficiency wage. This simple exposition should illustrate some of the main issues: http://www.stchas.edu/faculty/gbowling/WhyIsThereUnemployment.html
I might add that we should introduce into the discussion the concepts of structural and fricitonal unemployment, and address the question of what % of unemployment in the EU -likely variable by country- is frictional versus structural, to the extent we can real-world distinguish them.
Sure, december. A market clears when those who want to sell (buy) at the going price, can. Unemployment is when those who want to work at the going wage can’t find work. It is by definition a disequibilibrium phenomenon. Taxes such as these might change* the equilibrium level of employment but shouldn’t change whether the market is in equililibrium (or the extent to which it fails to be in equilibruim).
So a business tax (or an income tax or a sales tax) might reduce equililbrium employment if it lowers after tax wages, but have no effect on unemployment rates: the market might clear at a different level of employment. Pretty much like Apos’s post, except that unemployment is always a bad thing, the “good” unemployment he talks about is underemployment or (alternatively) greater enjoyment of leisure.
Broadly speaking, taxes should have no effect on unemployment rates. They may however affect the return to an underlying unemployment rate following an unexpected change in tax policy. So, in a definitional and theoretical sense, looking at unemployment rates and tax rates across countries is otiose.
*[sub]it is not necessarily the case that it will decrease employment. It is possible that it might increase it. In standard micro theory, work is a discommodity, income is a normal “good”. The supply curve of labour is be backward-bending for all workers at some wage rate. Empirical evidence suggests that it is for at least some workers.[/sub]
I think the first hurdle to overcome in this debate is defining the conditions that each nation uses to determine it’s “Official” unemployment rate. There are a number of methods a country can use to determine unemployment rates, not the least of which involve the minimum age requirement, inclusion or omission of students / prisoners / parolees/ semi- or under-employed persons and other factors.
While it is likely that there is a difference between unemployment rates in the US and abroad (just as there is between California and Wyoming or Tulsa and Tampa), the true difference is not readily determined by simply looking at the official numbers, or attributable to a single factor.
Just to underline the uselessness of arguing from specific examples:
Ireland is a tax haven in respect of corporate taxes and property taxes, but decidedly not in respect of other taxes, most expecially taxes on earned income (which, one would think, is a tax which might affect the labour market more than other taxes).
Ireland has been a tax haven on this model for over twenty years.
However, our low unemployment rate is recent. For most of the last twenty years we have had unemployment well above the European average.
—Still, the Law of Supply and Demand implies that higher tax rates will reduce employment.—
No no: higher taxes might well reduce things like growth and productivity and indeed the effort that everyone puts into the job market, but especially depending on what SORT of tax scheme is in place (how progressive, how lumped, etc.) there’s no necessary reason why everyone shouldn’t and couldn’t still have a job. They might not have as much income as they otherwise could have had: but we can’t easily tell whether that is really the case.
The problem really is that so many other factors are at work, that specific examples really are useless. That’s why we have econometrics in the first place: we need people who can come up with tricky ways to try and factor out the effects of other things and do empirical study of various policies.
An example: Regan’s cuts of the marginal tax rates were sold on the idea that they would increase the rates of growth and productivity. In reality, we didn’t see the promised rate increases, and we even saw some decreases. But before we can conclude that this was the failure of Regan’s policy, we have to account for the possibility that rates were declining due to other factors: most plausibly that the country was coming off the post-WWII high that was impossible to realistically sustain. Regan’s policies may have slowed what otherwise have been even FASTER drop-offs. Simply looking at the numbers and the timing of the policy gives us surprisingly little information about what was really going on.
However, some disquieting evidence that has recently been hotly debated suggests that the effects of tax policies last a LONG time, because they change people’s outlooks in very lasting ways. For instance: decreases in the marginal tax rates don’t seem to have had the degree of expected effect (which is not to say that they had no effect at all). Worse, it seems that increases in these tax rates do seem to cause drop-offs relatively fast. So essentially we have a problem of doing harm that is very hard to undo.
—Pretty much like Apos’s post, except that unemployment is always a bad thing, the “good” unemployment he talks about is underemployment or (alternatively) greater enjoyment of leisure.—
Calling it “underemployment” is misleading: under what? Economists, at least in theory, are not supposed to care whether or not you work and attain 20 utils of happiness from spending the income it gets you, or don’t work and gain 20 utils of pleasure from sitting around meditating and eating berries, or indeed any balance of work and leisure that attains that same 20 utils (or better, in which case we like it even more). Unemployment is bad only when it is associated with bad things: like a reduction of consumption. That’s why some people make the extra distinction of involuntary unemployment.
Well, actualla, your statement is likely to be true only where there is a generous unemployment/welfare benefit, so that for an appreciable portion of the otherwise-employable population, more money is earned by staying at home than by working and paying high earned income taxes.
In the main, the taxes that will have the most impact on employment are the “labor rigidity”-type taxes, particularly high employer-paid social benefit taxes. These increase the cost of an employee (wages + benefits + social benefit taxes), so the employee must add even more value to a company to make the hire worthwhile.
And again, as Collounsbury has noted, straightforward rigidity in terms of the costs of or inability to fire employees is more important in causing unemployment.
Sua also was analyzing from the POV of the effect of taxes on job-seekers. I was assuming that unemployment is caused by a reduction in the number of jobs available. In that case, corporate taxes are more important than personal taxes.
These points would tend to argue against low taxes being the cause of low unemployment. However, consider that Ireland’s corporate tax rate has apparently stayed constant (based on what UDS posted), while the rest of Europe’s soared.
This brings me to expand on what hawthorne and Scylla wrote. *Which labour market they thinking of? * If one considers, Sweden to be a single labour market, its internal economic system may be in balance. However, Sweden competes with the rest of the world. So, if Sweden’s tax rate goes up, businesses will tend to form or to expand elsewhere. (E.g., the company I work for is attempting to restructure itself to Bermuda, where it will pay no income tax. There was no thought of setting up in Sweden where the tax rate is over 50%!)
Apos wrote “higher taxes might well reduce things like growth and productivity and indeed the effort that everyone puts into the job market, but…there’s no necessary reason why everyone shouldn’t and couldn’t still have a job.” Even if an economy were totally insulated, in practice ISTM a reduction growth would tend to increase unemployment. Considering the competition from other economies, the effect would be greater.
Apos, I’m confused about your reference to Reagan. His tax cuts were followed by big economic growth (as were JFK’s tax cuts). I see less significance to whether the amount of growth matched some particular estimates. Your point sounds like it came from someone looking for an excuse to discredit the Reagan economic success. Do you have a cite?
In summary,[ol][]The effect of tax rates on job creators is more important than its effect on job seekers.[]One must consider not only how a given country’s economy works, but also the competition for business between countries.Not only are Europe’s taxes high, but they have also grown dramatically over the last 35 years.[/ol]
Not necessarily. In Ireland, for example, low corporate taxes are paid for in large part by high income and expenditure taxes, and these of course push up wage demands. Hence our tax regime may favour enterprises whose business is not labour-intensive at the expense of those whose business is, and this would tend to create unemployment rather than reducing it. Similarly, a low tax rate which is balance by lower expenditure on, e.g. health services may result in demands for higher wages to pay for health insurance, and a similar effect will be observed. Or low taxes leading to low expenditure on education will, in time, tend lead to an unproductive workforce, which again might be expected to affect employment adversely. And the benefit of low social security taxes usually needs to be set off aginst the consequent cost of contributing to occupational retirement schemes. And so forth. Hence a simple review of tax rates applied to enterprises (or, I concede, tax rates applied to labour) will not necessarily correlate to unemployment rates.
Not necessarily. It depends on what kind of unemployment is happening. If it is resulting from a structural adjustment in an industry, no amount tax cutting is going to increase employment. For example, I’m in manufacturing, and a new robot has been invented that can do the work of 100 men. Naturally, I fire 100 men and replace them with the robot. Now you can cut my taxes all you want, but those workers are not getting their jobs back. In this case, the tax rate makes no difference.
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That’s nice. But how many jobs is that going to bring to Bermuda? And how many jobs is Sweden missing out on by not having your company move there. Probably not many. So the question remains…is Sweden’s tax rate really causing (hypothetically) its high unemployment rate?
Do you have a cite that Reagan’s tax cuts were the cause of economic growth? It was far more likely that the boost in Defense spending triggered the economic growth, not tax cuts that screwed the middle class.
We have yet to prove that. In fact, I would argue it the other way. The tax rates on job seekers are more important. Or rather, the tax rate on consumers is more important. You can decrease taxes on suppliers all you want, if there is no demand for stuff then no one is going to be expanding their business and creating more jobs. On the flip side, if you cut taxes to consumers and they start purchasing more, then businesses will produce more to meet the demand regardless of what the tax rate on them is (unless it’s 100% or something). This will then stimulate the businesses that supply the businesses that supply the consumers and so on and so forth. Voila, a booming economy through an extremely oversimplified theory.
We’ll call this demand-side economics (or the trickle-up theory) .