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Article Dans Une Revue European Economic Review Année : 2017

Strategic fiscal policies in Europe: Why does the labour wedge matter?

Résumé

Most European countries suffer from a structural weakness in employment and competitiveness. Can an optimal tax system reinforce European countries in this respect? In this paper, we show that fiscal competition can be a welfare improving second best solution if the labour wedge is sufficiently large. Indeed, a sufficiently large labour wedge calls for an expansion of the production set in both countries, thus increasing global opportunities. For a small labour wedge, this would not be the case, because the terms-of-trade externality would call for a fiscal policy that exacerbates a non-cooperative behaviour between countries. In a two-country world, we show that the symmetric Nash equilibrium can be Pareto-efficient, if employment subsidies are financed by a consumption tax. This is not the case when the former are financed by tariffs.
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Dates et versions

hal-03969937 , version 1 (02-02-2023)

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François Langot, Matthieu Lemoine. Strategic fiscal policies in Europe: Why does the labour wedge matter?. European Economic Review, 2017, 91, pp.15-29. ⟨10.1016/j.euroecorev.2016.09.005⟩. ⟨hal-03969937⟩
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