Labor taxation and its effect on employment : A study of labor taxation in 13 countries

Abstract: The purpose of this thesis is to try to determine the effect that labor taxation has on the employment rate in 12 European countries and the United States. This will be done in order to determine more generally the effect that taxation of income has on the employment rate. The empirical model will use an ordinary least squares (OLS) panel regression, and will use panel corrected standard errors. The variables consists of five indicators: the employment rate – which is the dependent variable – and the tax wedge – which is the main independent variable, in addition to GDP per capita, the inflation rate and output per hour which works as control variables. Data covers the years 1998-2008. The conclusion is that taxation on labor has a negative effect on the employment rate. A one percentage point increase in the growth rate of the tax wedge causes the growth rate of the employment rate to fall by 0.1205 percentage points in the continental European country group and 0.0555 percentage points in the Anglophone country group. An increase of 0.1763 percentage points was measured for the Nordic country group, but this was not statistically significant.