Tax Wedge and Skills: Case of Poland in International Perspective

Góra, Marek; Radziwill, Artur; Sowa, Agnieszka; Walewski, Mateusz

doi:10.2139/ssrn.1411202

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Tax Wedge and Skills: Case of Poland in International Perspective

CASE Network Reports No. 64

52 Pages Posted: 29 May 2009

See all articles by Marek Góra

Marek Góra

Warsaw School of Economics (SGH); IZA Institute of Labor Economics

Artur Radziwill

CASE - Center for Social and Economic Research

Agnieszka Sowa

CASE - Center for Social and Economic Research

Demographic change (driven by the second demographic transition) led to an uncontrolled increase in scale of various social expenditure in the OECD area, especially in continental Europe. Costs of social transfers created fiscal pressure leading to the necessity of tax increases all over Europe, including the New Member States. Employment consequences of emerging higher tax wedge has become the topic of large body of research. However, surprisingly little evidence is known on distribution of that problem across workers. Is the effect of high tax wedge equally spread or certain groups of workers suffer more than others? More specifically, are low productivity workers exposed more to the problems caused by high tax wedge?

The goal of our research is to investigate empirically the latter question. The empirical hypothesis based on theoretical considerations was that high tax wedge creates especially undesirable effects for the unskilled. In other words, what is bad for the high productivity workers, is very bad for low productivity workers. If it is the case, the commonly used arguments for high public redistribution holds too much smaller extent. On the other hand, the case for progressivity in labour taxation gets stronger. Most importantly, the tax wedge is becoming the issue of urgency in countries abundant in low skilled labour.

The research providing background for this paper was ambitious and modest at the same time. It was ambitious since the problem is complex and important, modest since available data is scant and therefore, the authors could not expect very robust results. Given these limitations, the eventual outcome of the research is probably better than initially anticipated. The remainder of this paper is divided into four sections. The following section presents the basic theory and existing literature. Section three discusses implications for the EU new member states. Section four investigates the problem econometrically in the cross-country perspective. Section five and six provide microeconomic evidence on wage rigidities and incentives for job search, respectively. Section seven concludes.

Keywords: tax wedge, labour market, employment, skills, New Member States, Poland

Suggested Citation: Suggested Citation

Góra, Marek and Radziwill, Artur and Sowa, Agnieszka and Walewski, Mateusz, Tax Wedge and Skills: Case of Poland in International Perspective (May 28, 2009). CASE Network Reports No. 64, Available at SSRN: https://ssrn.com/abstract=1411202 or http://dx.doi.org/10.2139/ssrn.1411202