Basic Models

Abstract

This chapter provides an overview of the models which are employed for the analysis of the labour market effects of tax variations. In particular, Section 2.1 depicts the fundamental assumptions with respect to the objective functions of the economic actors involved, the constraints which they face, the tax system, and the institutional details of the bargaining outcomes. Section 2.2 derives the equilibrium levels of wages and employment for a competitive labour market. Section 2.3 looks at union-firm bargaining solutions. First, an exogenously given union membership and negotiations solely about wages are presumed. Subsequently, outcomes involving negotiations about wages and employment are investigated, while the assumption of a given union membership is maintained. Then, the analysis reverts to the case of wage bargaining but allows for an endogenously determined number of union members in the context of a social custom model. Section 2.4 presents efficiency wage approaches. In this framework a distinction is made between a short-run analysis in which the firm’s profits are allowed to vary, and a long-run perspective in which the entry and exit of firms ensures constant profits.