Would Cutting Payroll Taxes on the Unskilled Have a Significant Effect on Unemployment?
This paper states two recommendations from an OECD Report: (1) 'Reduce non-wage labour costs, especially in Europe, by reducing taxes on labourà' (2) 'Reduce direct taxes (social security and income taxes) on those with low earningsà'. After looking at the first recommendation we conclude that any attempt to generate a significant reduction in the unemployment rate by cutting across-the-board tax rates on employment is likely to fail. We then turn to the second recommendation and give three arguments as to why it may be a good idea. The remainder of the paper investigates the arguments. We look at why the unemployment rate of the unskilled might be higher than that of the skilled, and how we might expect their relative unemployment rates to respond both to relative demand shocks and to more natural shocks. We then examine the facts - what has happened to relative unemployment (and non-employment) rates, and wage rates throughout the OECD. Finally, we discuss the implications of these facts for the proposed policy measures.
February 1996 Paper Number CEPDP0276