Incidence of Specific or Employment Tax in Non-Walrasian Fixed Price Model with Efficiency Wage
The present study formulates a generalized model which integrates standard efficiency wage model (henceforth SEWM) and standard non-Walrasian macro-model (henceforth SNWMM) allowing the firm to set efficiency real wage by introducing the possibility of commodity demand constraint where price is assumed to be exogenously fixed. In this integrated model, unemployment is the result of both demand and efficiency effect and is higher as compared to both SEWM (where demand effect is absent) and SNWMM (where efficiency effect is absent) This model also reveals that, under the constrained commodity demand situation, imposition of pay - roll specific tax generates employment when elasticity of effort with respect to specific tax equals or exceeds unity; this result strongly contrasts SEWM (signifying unconstrained commodity demand situation with flexible price) where imposition of such tax always lowers employment. Again, impact of such taxation is missing in SNWMM in the absence of efficiency wage consideration.
KeywordsEfficiency wage Non-Walrasian model Payroll tax Specific tax Employment Effort elasticity
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