No. 373 - Taxation and labour costs in the industrial countries

The paper analyzes the effects on labour cost of the level and composition of taxes on labour. In particular, it estimates the shift of tax onto costs for fourteen industrial countries in the period 1980-96. The results of the econometric analysis are as follows: (i) the level of and changes in taxation and social security contributions have statistically significant effects on the cost of labour; (ii) income tax and social security contributions paid by the employer have a greater effect than do social security contributions borne by the worker; (iii) the pass-through of taxes to costs is greater in the European countries where the wage-bargaining system is neither completely decentralized nor completely centralized. In the light of these results, the paper evaluates the measures taken in recent years in Italy to lessen the taxes on labour. These measures aim at reducing the two components ƒ{ income tax and social security contributions borne by the employer ƒ{ that the econometric analysis shows have a greater effect on the cost of labour.