TY  - JOUR
AU  - Alesina,Alberto
AU  - Perotti,Roberto
TI  - The Welfare State and Competitiveness
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4810
PY  - 1994
Y2  - July 1994
UR  - http://www.nber.org/papers/w4810
L1  - http://www.nber.org/papers/w4810.pdf
N1  - Author contact info:
Alberto F. Alesina
Department of Economics
Harvard University
Littauer Center 210
Cambridge, MA 02138
Tel: 617/495-8388
Fax: 617/495-7730
E-Mail: aalesina@harvard.edu

Roberto Perotti
IGIER Universita' Bocconi
Via Roentgen 1
20136 Milano
ITALY
Tel: 39 02 58363073
Fax: 39 02 58363302
E-Mail: roberto.perotti@unibocconi.it
M2  - featured in NBER digest on 1995-01-01
AB  - In all modern industrial countries, redistributive expenditures are a larger component of the government budget than consumption of goods and services.  In this paper, we use a general equilibrium, two- country model with exportables, importables and nontradables to study redistribution across different types of agents in a world characterized by the presence of labor unions and distortionary taxation.  We show that an increase in transfers to, say, retirees, financed by distortionary taxation, can generate a loss of competitiveness (defined as an increase in relative unit labor costs for tradable goods), an appreciation of the relative price of nontradables, and a decrease in employment in all sectors of the domestic economy.  The same qualitative effects would also obtain in the case of an increase in transfers towards the unemployed even if financed by non-distortionary taxation.  Moreover, all these effects of labor taxation depend in a nonlinear way on the degree of centralization of the wage setting process in the labor market.  We then estimate the effects of labor taxation on unit labor costs and the relative price of nontradables in a sample of 14 OECD countries. We find considerable empirical support for the model.
ER  -