THE EFFECT OF TAXES ON LABOR IN EFFICIENCY WAGE MODELS

This paper analyses the effects of labour taxation on wage and employment in a moral hazard-efficiency wage model, where effort is a continuous variable and workers are risk averse. In the model examined, ad valorem and specific taxes on labour do not have the same consequences on the real wage. Both taxes have a negative effect on employment, but the imposition of a specific tax causes an increase in the net real wage (including firms to raise the quality of their workers). These results are compared with those obtained in other versions of the 'shirking' efficiency wage model. © 1991.