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Are Employment Policies Counterproductive When Wage Setting Is Centralized?

  • Economics
  • Political Science


When government policy is subjected to a balanced budget constraint, total income of the workers is independent of employment policy. An employment policy distributes income more evenly and may lead a union with strong preferences for equality to raise its wage. However, a sufficiently vigorous employment policy is always effective. Unions that maximize the after-tax real wage always lower the nominal wage when government employment policy becomes more vigorous. The constraints enforce an implicit tax-based incomes policy (TIP), and there is limited scope for other forms of TIP. Copyright 1995 by The editors of the Scandinavian Journal of Economics.

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