Researchers of the Centre for Social and Economic Research (CASE) analyse the impact of tax wedges on employment and find that the consequences of tax wedge might be devastating for low-skilled labour.
Making labour market rules more flexible is one of the main goals of the Lisbon strategy, which aims at transforming the EU into a competitive and dynamic, knowledge-driven economy.
At the same time the discussion about the European Social Model throws up new questions on how to balance deregulation of labour markets and a good level of social protection. The analysis warns of the risks of high labour taxation for Central and Eastern European countries and speaks in favour of lower taxation for low-skill labour.
The authors, M. Gora, A. Adziwill, A. Sowa and M. Walewski, argue that demographic change has led to an uncontrolled increase in scale of various social expenditure in the OECD area, especially in continental Europe. Costs of social transfers have created fiscal pressure leading to tax increases all over Europe, including the New Member States, such as Poland.
Therefore, the authors analyse the effect of high tax wedge (the difference between the worker’s take-home pay and what it costs to employ him ) on different groups of workers in Poland. More specifically it shows that low productivity workers are more exposed to the problems caused by high tax wedge than high skill workers.
The cross-country investigation confirms the negative impact of labour taxes on low skill employment, while OECD countries with better skill endowment coped better with such effects.
Therefore, the policy recommendation for Central and Eastern European countries is to be aware of the risks of high labour taxation in these countries with a large percentage of low-skilled labour.