Belgium: Selected Issues

This paper provides a number of complementary estimates of potential output and the output gap—variables that cannot be observed directly. After a substantial increase in the tax wedge in the 1970s and the 1980s, which has been widely thought to have been partly responsible for the sharp rise in unemployment rates, the Belgian authorities instituted a policy of reduction in employers' social security contributions. The reforms will reverse the increase in average income tax rates during the 1990s.

Abstract

This paper provides a number of complementary estimates of potential output and the output gap—variables that cannot be observed directly. After a substantial increase in the tax wedge in the 1970s and the 1980s, which has been widely thought to have been partly responsible for the sharp rise in unemployment rates, the Belgian authorities instituted a policy of reduction in employers' social security contributions. The reforms will reverse the increase in average income tax rates during the 1990s.

II. The Effect of Tax Changes on Belgian Employment1

A. Introduction

29. Belgian employment has been increasing at a rapid clip for some years, following a brief decline in the early 1990s, and the pace has even accelerated somewhat in the last four years. Private sector dependent employment grew, on average, by 1.2 percent a year between 1994 and 1999, well above the average 0.4 percent growth of the previous expansion (Table 1). To some extent, this record reflects a pickup in aggregate economic activity, but it may also be due to changes in taxation implemented after 1993 aimed at reducing firms’ labor costs and thereby stimulating labor demand. This chapter examines the effect of these tax changes on employment.

Table 1.

Belgium: Recent Labor Market Performance

(Annual change over the period indicated, in percent)

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Source: Banque Nationale de Belgique.

30. Tax policy since 1993 might, on theoretical grounds, be expected to have boosted the labor intensity of production, thus stimulating employment beyond what would be expected from output increases alone. The effect of this policy would depend on, among other parameters, its effect on wage negotiations and the elasticity of labor demand with respect to changes in labor costs. This chapter first describes in detail tax changes of the last twenty years in Belgium and their effect on aggregate tax measures. It then outlines a theory of wage bargaining and employment determination in which it takes income taxes and social security contributions explicitly into account. Finally, simulations present estimates of the effect on employment of the tax changes implemented since the 1980s.

B. Tax Changes in the Last Two Decades

31. In Belgium, tax revenues including social security contributions rose from 33 percent of GDP in 1970 to about 45 percent in 1999 (Figure 1). (This upward trend was not unique to Belgium, and indeed it broadly mirrors the pattern in other continental European countries.) In addition, direct taxation on individuals and corporations (income taxes, corporate taxes, and social security contributions) has risen sharply relative to GDP since 1970, whereas indirect taxes have remained roughly constant (Table 2). Since 1993, the rise in the tax burden has slowed markedly, as an increase of 2.5 percentage points of GDP in corporate and indirect taxes was partly offset by a leveling of direct taxation on individuals and a reduction of 1 percentage point of GDP in social security contributions by employers and employees. Thus, a period of several years of rising taxes on individuals and labor has been followed by a period when the tax burden has shifted somewhat to consumption and, perhaps, to corporations. This recent trend seems set to continue: the government cut social security contributions in 2000, and according to official estimates they will fall again as a percentage of GDP in 2001. Also, a tax package of cuts in individuals’ income tax rates through 2006 was introduced in October 2000.

Figure 1.
Figure 1.

Belgium: Tax and Social Security Revenues

(Percentage of GDP)

Citation: IMF Staff Country Reports 2001, 045; 10.5089/9781451803167.002.A002

Source: Belgian authorities and Fund staff calculations. Observations for 2000 and 2001 are based on authorities’ estimates.
Table 2.

Belgium: Composition of Tax and Social Security Revenues in Selected Years

(Percentage of GDP)

article image
Source: Belgian authorities and Fund staff calculations.

32. The strategy of reducing direct taxes on labor income assumes that the high unemployment rate in Belgium is, at least in large part, due to the wedge between labor costs and workers’ take-home pay. Changes in employers’ social security contributions (hereafter, SSC) affected the wedge between labor costs and labor income while changes in individuals’ SSC and personal income tax modified the wedge between gross and net income.2 The sum of all these taxes determines the wedge between labor costs and disposable income, viewed by many researchers and policymakers as a crucial determinant of labor market outcomes (see, for instance, Daveri and Tabellini, 2000).

33. Figure 2 shows the evolution of the wedge since the 1980s and Figure 3 presents each of the two main components: the sum of the employers’ and employees’ SSC, and the income tax. The overall wedge increased markedly in the 1980s, reflecting a sharp hike in SSC. In the 1990s, the rise continued, but at a much reduced pace. In effect, increases in income taxes were mostly, but not fully, offset by reductions in SSC.

Figure 2.
Figure 2.

Belgium: The Fiscal Wedge

(Percentage points)

Citation: IMF Staff Country Reports 2001, 045; 10.5089/9781451803167.002.A002

Source: Banque Nationale de Belgique and Fund staff calculations. The path for the fiscal wedge between 2001-2005 is consistent with Saintrain (2001).
Figure 3.
Figure 3.

Belgium: Decomposition of the Fiscal Wedge

(Percentage of labor costs)

Citation: IMF Staff Country Reports 2001, 045; 10.5089/9781451803167.002.A002

Source: Banque Nationale de Belgique and Fund staff calculations. Paths for 2001-2005 are consistent with calculations by Saintrain (2001).

34. Policies to lower SSC were envisaged as early as 1981, however, with the adoption of the Plan Maribel, which targeted reductions in employers’ SSC at blue-collar workers, mainly in manufacturing. Other programs focused mostly on long-term unemployed individuals and young unemployed workers. The Plan plus un, for instance, was created in 1983 and reduced a firm’s SSC when it hired one extra worker from the unemployment pool. The reduction was 100 percent in the first year and was phased out after three years. Another example, the Plan d’insertion professionnelle des jeunes, created in 1984, allowed firms to pay to some newly hired young workers in their first year of employment 90 percent of the regular wage paid to regular employees. In the second year, the employee would receive 100 percent of the regular wage but firms were granted a 10 percent discount in SSC.

35. Policies of reducing firms’ SSC were reinforced in 1993. The Maribel-bis and Maribel-ter, modifications of the original plan, allocated SSC reductions to sectors deemed sensitive to international exposure. More importantly, the Plan Global was introduced. This initiative can be divided into four parts: 1) overall reductions in the rate of employers’ SSC, which tapered off at higher wages; 2) a reduction in employers’ SSC conditional on hiring young workers; 3) further reductions in SSC for firms hiring their first worker; 4) creation of the Plan d’entreprises, which links reductions in SSC to hiring within the context of eight different ways of reorganizing the production process.

36. The Plan Global has since been modified in many ways. At the end of 1994, the social partners adopted industry employment agreements that expanded SSC cuts when an enterprise boosted its labor force. In the same year, the Plan d’embauche des jeunes began to be phased out and the Plan d’avantage à l’embauche, targeting the long-term unemployed, was introduced. In 1995, the government raised the maximum salary threshold applied to the schedule of reductions in SSC. In 1996, the Plan Maribel was expanded to all the industries and the Plan plus un was extended to a second or third employee (Plan plus deux and plus trois). In 1997, the Plan Maribel social established a reduction in SSC to employers in the health and social services industries as long as they fully used the credit to augment employment. The industry employment agreements were broadened in 1997-98, when reductions in SSC were more closely linked to net employment increases associated with work reorganization, but in 1999 they were abolished by the social partners.

37. In 1998, the emplois-services program introduced further reductions in SSC to reintegrate long-term and/or low-skilled unemployed workers into tasks which had become extinct owing to high labor costs. In 1999, the Maribel social was expanded and the size of the reductions in SSC was amplified. In the same year, the other Maribel schemes and policies targeted toward low-wage earners were reorganized under the Mesure structurally In 2000, the Mésure structurelle was reinforced and the Premier emploi program was introduced. The latter reduces, under certain conditions, the SSC of employers that hire young individuals fresh from school. After many years focusing on SSC of employers, in 2000 the government introduced reductions in SSC of employees, with a view to increasing the rewards from work for low-wage earners and thereby boosting labor supply at the lower end of the skill distribution. Estimates of the budgetary impact of these measures are shown in Table 3. Box 1 summarizes these measures and highlights some that raised the rate of SSC during the 1980s and 1990s.

Table 3.

Belgium: Decrease in Social Security Contributions

(In billions of Belgian francs)

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Source: Budget, ONSS, Banque Nationale de Belgique, and Bureau Federal du Plan.

38. The government introduced several income tax reforms in the 1980s and 1990s. In the 1980s, tax brackets and the taxable threshold were indexed to inflation, the taxable threshold was raised, the tax schedule was changed, and, overall, rates were slightly reduced (Box 1). While these reforms tended to lower the income tax burden, in the 1990s other changes worked in the opposite direction, including the 3 percent complementary crisis contribution (CCC), the partial de-indexation of tax brackets, and the extra contribution to the social security system imposed on individual income taxes. In 1999, the government re-introduced full indexation of tax thresholds and brackets to the so-called health index of prices, reduced the CCC to 2 percent for low-income families, and instituted a number of other measures.

39. Looking ahead, the government has established a schedule to discontinue the CCC by 2003 and, as laid out in the multi-year fiscal framework presented along with the 2001 budget, to reduce income taxes through 2006. The specific measures under this plan include the following: a tax credit for low-income families (reducing revenue by BEF 18 billion), changes in tax brackets (BEF 31 billion), an increase in professional tax rebates (BEF 13 billion), the elimination of marginal tax rates above 50 percent (BEF 7 billion), equalizing the treatment of married and nonmarried couples (BEF 44 billion), and decreasing taxes on social transfers (BEF 16 billion). These measures are expected to reduce the revenue-GDP ratio by about 1.6 percentage points by 2005, with the elimination of the CCC accounting for about 0.3 percentage point. Under this policy, the average income tax on wages and salaries is expected to fall to its 1993 level by 2005, though not to its level at the beginning of the 1990s (Table 4).

Table 4.

Belgium: Average Income Tax Rate on Labor Income Before and After Different Reforms

(Percent rate)

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Source: Fund staff calculations.

A Time-Line for the Fiscal and Quasi-Fiscal Reforms in Belgium in the Last 20 Years

Principal Measures Reducing the Fiscal and Quasi-Fiscal Pressure on Labor Income

  • 1981: Plan Maribel targeted declines in firms’ social security contributions (SSC) to the hiring of blue-collar workers.

  • 1983-1984: Plan plus un reduced SSC when a firm’s employment level increased by one worker coming from the unemployment pool. Plan d’insertion professionnelle des jeunes aimed at facilitating the hiring of young workers. These plans, together with other minor ones, did not mobilize as many resources as the Plan Maribel.

  • 1985: Personal income tax reform

    • ○ indexation of tax brackets and taxable threshold

    • ○ raising the taxable threshold

    • ○ slight decrease of the tax rates

    • ○ Budgetary impact: about BEF 80 billion.

  • 1988: Personal income tax reform

    • ○ indexation of tax brackets and taxable threshold

    • ○ reshuffling of the tax schedule

    • ○ separate taxation of labor income for married couples with two earners

    • ○ income splitting for married couples with one earner

    • ○ tax rebates for replacement incomes

    • ○ new system for child burden rebates

    • ○ Budgetary impact: about BEF 90 billion.

  • 1993-2000: Reduction of SSC mainly focusing on specific target groups. This period began by the introduction of the Plan Global in 1993. Also includes the revamping of the Plan Maribel at different points in time and an expansion of the Planplus un. Since April 2000 employees’ contributions were also reduced. Budgetary impact: see Table 3.

  • 1999: Phasing out of the “complementary crisis contribution” (CCC) begun.

  • October 2000: The government presented a back-loaded reform of the income tax system. Among the main items, the reform introduced once again a complete indexation of fiscal parameters, accelerated the reduction of the CCC—which by 2003 will be eliminated—and raised the deductions per child. The effects of the reform will begin to be felt by 2002 and its total budgetary impact is estimated at about BEF 164.4 billion, with the elimination of the CCC accounting for BEF 30 billion.

Principal Measures Augmenting the Fiscal and Quasi-fiscal Pressure on Labor Income

  • 1980-84: Gradual increase of employees’ SSC from 10.11 percent to 12.07 percent.

  • 1984, 1985 and 1987: In each year, 2 percent of wage indexation was actually directed to the social security system. Starting in 1987, these proceeds became a permanent levy for the social security system formally assimilated in the employers’ contribution. By the end of 1987, the employers’ rate of SSC had risen by about 6 percentage points when compared with its level at the end of 1983.

  • 1992: Increase of 1 percentage point of the rate of employees’ SSC to 13.07 percent.

  • 1993: Introduction of the “complementary crisis contribution”, a 3 percent supplement on all income taxes paid. This measure generated revenues of about BEF 30 billion.

  • 1994: Introduction of a special social security contribution. This measure generated revenues of about BEF 20 billion.

  • 1993-98: Suspension of indexation of tax brackets and some thresholds for tax rebates.

C. A Theoretical Framework

40. The net impact of past and prospective policies regarding SSC and income taxes on employment depends on a set of parameters linking taxes to wage formation and employment determination. This terrain has been the subject of intensive scrutiny during the last decade. Most of the studies have focused on cross-county differences in institutional arrangements, notably, Layard et al (1991), Scarpetta (1996), Nickell (1997), Nickell and Layard (1997), and Daveri and Tabellini (2000). In broad terms, this literature has concluded that: (i) generous and long-lasting unemployment benefit entitlements raise unemployment; (ii) strong trade unions can be expected to raise unemployment, except if there is coordination with firms over wage setting; (iii) increases in the tax wedge raise the unemployment rate, although there is some disagreement about the magnitude of this effect. (Daveri and Tabellini (2000) concluded that it can explain almost all the increase in European unemployment between 1965 and 1995, whereas Nickell and Layard (1997) adopted a more skeptical view.)

41. It is not clear how these results can best be applied to an analysis of the performance in a particular country, especially in view of cross-country institutional differences. For Belgium, a few studies have produced estimates for the elasticities of wages and employment to changes in tax parameters, but these estimates vary significantly. This section develops a simple model for wage and employment determination in Belgium, which will then be used to inform simulation exercises carried out in the next section. The model and the ideas presented below freely borrow aspects of the theoretical setup discussed in Layard et al. (1991), Cotis et al. (1996), and Bruyne et al. (1998).

42. One of the key characteristics of the Belgian labor market is the importance of centralized wage bargaining between employers and labor unions. Thus, the first step in wage negotiations is to establish an economy-wide wage norm designed, by law, to preserve the external competitive position of the Belgian economy vis-à-vis its three main trading partners: Germany, France, and the Netherlands. This arrangement suggests that a firm-level bargaining model would be inappropriate for Belgium. However, the wage norm serves as a focal point for a second round of negotiations carried out at the sectoral or enterprise level, and the outcomes of this second round can vary substantially.3 Therefore, a firm-level (or in an industry where numerous small firms band together, a sectoral-level) model of wage bargaining may be more suitable than would appear at first sight.

43. In such a model, firms are assumed to determine employment by maximizing profits given the negotiated wages. On the other hand, unions take into consideration the employment effects when negotiating the wage.4 This is the right-to-manage model. Formally, the profit maximization of the representative firm assumes the capital stock is fixed, the production function is Cobb-Douglas, and the demand for output is a function of the real exchange rate (the ratio of foreign prices, Pf, to domestic prices times the nominal exchange rate, e), since Belgium is a small open economy. This setup can be considered a “medium-run” model because firms do not face costs to adjust the labor force but capital is fixed.

MaxNΠ=P(Yd)YW(1+te)N(1)s.t. Y=TKaN1αYd=(ePfP)cH(X),ε>1Yd=Y

where N, T, K, te, ε, and H(X) represent, respectively, employment, total factor productivity, capital, the payroll tax rate paid by the firms, the absolute value for the price elasticity of aggregate demand and a function of an exogenous set of income variables. The firm’s optimal demand for labor derived from this problem is

N=(W(1+te)P)1α(ε1ε(1α)T)1αK(2)

44. Note that output depends on prices through a markup over marginal costs, which depends on the aggregate output elasticity, ε. Note also that the elasticities of labor demand to exogenous changes in the negotiated wages or in social security taxes, εNW (obtained by solving (2) explicitly for P), and the share of labor costs in profits, λ, are constant parameters, depending only on the aggregate output elasticity and on the labor intensity of production, (1-α).

45. The bargaining problem can be described as the maximization of a Nash function subject to this labor demand function:

MaxwiΩi=[Niy(WiCA)]θΠis.t.Ni=N(Wi),fromfirm’sprofitmaximization,(3)

where Ni, Wi, and IIi represent, respectively, employment, wage, and profits for firm i. θ measures workers’ relative bargaining power and γ indicates how much unions care about aggregate employment. C is the consumer price index adjusted for the fiscal wedge between earned wages and workers’ true purchasing power. Defining Pc as the net-of-tax consumer price index, tc as the consumption tax rate, td as the income tax rate, and tss as the social security tax rate, C can be written as

C=PC[1+tc(1td)(1tss)](4)

A represents workers’ outside opportunities, is assumed to be the same for every worker in the economy, and can be written as

A=(1u)WC+uBCU(5)

where u, W, B, and CU are the unemployment rate, aggregate wages, unemployment benefits, and the consumer price index adjusted for the fiscal wedge on unemployment benefits. The unemployment rate is a proxy for the probability of finding work elsewhere in case of disagreement during the bargaining process.

46. The first-order condition of this bargaining problem yields:

θγ(WiCA)εNW+WiCWiCA=λ(6)

or

WiC=mA,m(θ,γ,λ(ε,α),εNW(ε,α))(7)

In words, real wages corrected for the tax wedge are determined as a markup over workers’ alternative income. This markup will be higher when workers’ bargaining power is stronger, when the demand for output and the demand for labor are less elastic, when the labor intensity of production is less, and when workers care little about the level of employment. As all workers are assumed to be identical, Wi = W, and using the formula for A shown in equation (5) yields,

W=mu1m(1u)BCCU(8)

47. Equations (2) and (8) determine the equilibrium in the labor market. It is important to note that wages will be higher when the ratio between the fiscal wedge on labor income and the fiscal wedge on unemployment benefits is larger. So, to the extent that employed and unemployed individuals pay the same consumption price including taxes, indirect taxation (and the Level of consumer prices) will not play a role in wage determination. Log-linearizing both equations and taking first-differences yields,

Δn=Δqn+aΔ(wp)aΔte+aΔt+Δk(2)
Δw=Δqw+Δb+Δ(tss+tdtu)+vΔn(8)

where the lower-case symbols represent the logarithm of the respective variables, A is the first-difference operator, and the q parameters are shift variables. The relative tax wedge can be simplified as the difference between the rate of SSC and income taxes of employed individuals and the direct taxes on unemployment benefits, tu. The linearization of the wage setting equation was done with respect to the ratio of employment to the labor force, (1-u). Changes in this ratio were approximated by changes in the logarithm of employment.5 Solving, changes in employment can be written as:

Δn=11+av[(ΔqnaΔqw)aΔ(tss+tdtu)aΔteaΔ(bp)+aΔt+Δk](9)

Employment will grow with reductions in the relative tax wedge of employed individuals, in the rate of employers’ SSC, and in real unemployment benefits. Increases in the capital stock, and in total factor productivity, as well as wage moderation, will also boost employment.6 Wage moderation is captured by the model as an increase in the “preference for employment”, γ, which causes a decline in wages’ markup over workers’ alternative income, m, and thus a downward shift in the wage-setting equation, Δqw<0. In the context of the model presented here, a change in γ, and therefore in m, also affects the sensitivity of wages to the unemployment rate, but this effect is not considered in the simulations below,7

D. Simulations

48. Available elasticities can be applied to the structure of the model to evaluate the impact of tax changes on employment. (Estimation of the model is beyond the scope of this paper.) The key parameters needed for this exercise are: the (absolute value of the) elasticity of demand for labor to changes in real labor costs, a; and the (absolute value of the) sensitivity of wages to changes in the unemployment rate, v. One important limitation of this exercise, given the lack of further information, should be kept in mind: it is assumed that the average direct tax on unemployment benefits, tu, remained constant throughout the period under analysis.

49. For the value of a, the estimate of 0.5 reported in Bossier et al. (1995), a publication by the Bureau du Plan, is adopted. This estimate is consistent with the implied long-run elasticity of labor demand in Jeanfils (2000). Other direct estimates for the elasticity of labor damand in Belgium are shown in Table 4. To match the comcept used in the model derived here, where firms do not face costs of adjusting employment, the discussion below focus on what some papers call “long-run elasticities.” These estimates take into account the lengthy adjustment of employment to cost changes but still consider capital as exogenously given. The chosen estimate lies near the middle of the -0.2 to -0.7 interval presented by Hamermesh (1993) for a variety of countries, and the -0.41 to -0.64 range for the United Kingdom estimated by Nickell and Wadhwani (1991). By contrast, the estimates presented in Konings and Roodhooft (1997) and Dréze and Modigliani (1981) are at the high end, not only for Belgium but also for other countries. The only well-known estimates with the same order of magnitude are reported in Symons and Layard (1984) for the United States, Canada, and Japan (-1.25, -2.5, and-1.75, respectively). By the same standard, the estimates presented in Bruyne et al. (1998) seem too low.

Table 5.

Belgium: Selected Estimates of Labor Demand Elasticity

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50. Jeanfils (2000) updates the quarterly macroeconomic model of the National Bank of Belgium. From his results, a v equal to 0.007 can be inferred. The simulations based on the chosen values for a and v are presented in Table 6.8 The negative employment effect due to the increase in SSC in the 1980s is substantial: employment would eventually have declined by about 4½ percent in the absence of wage moderation, capital accumulation or technical progress.9 The 1990s were characterized not only by reductions in employers’ SSC, which provided a small stimulus to job creation, but also by rises in personal income taxes. As a result, the tax wedge on labor costs changed little but its final effect on employment, albeit small, was still negative.10

Table 6.

Belgium: The Impact of Changes in the Tax Wedge on Employment

(Percent changes from the beginning to the end of each period)

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Source: Fund staff calculations. Simulations use elasticity in equation (9).

51. Looking ahead, the tax changes scheduled to be phased in over the next four years are simulated to boost employment by 1 percent. This figure is only a bit larger than the 0.6 percent—or 24,000 extra workers—for the same period provided by Saintrain (2001). The gap between the two figures is not only due to different assumptions for the key elasticities: Saintrain’s estimate was obtained by using the large-scale macro-model from the Bureau du Plan and likely takes into consideration the feedback of tax increases into key economic variables (e.g. prices) that are ignored here.

E. Conclusions

52. After a substantial increase in the tax wedge in the 1970s and in the 1980s, which has been widely thought to have been partly responsible for the sharp rise in unemployment rates, the Belgian authorities instituted a policy of reductions in employers’ social security contributions. Social security contributions have indeed fallen, but the overall tax wedge—including income taxes—has not been reduced. This outcome mainly reflected the limited size of the cuts in social security contributions and a continued, if slow, rise in income taxes. As a result, based on the model developed here, the policy changes of the 1990s were successful in ending the negative employment effects of the previous decade, but they did not actually raise employment.

53. Looking ahead, the income tax reform introduced in October 2000 on employment may have more substantial effects. As budgeted, this reform will reverse the increase in average income tax rates during the 1990s, and in addition, the rate of social security contributions is also expected to decline to its 1992 level. However, both will remain very high relative to levels that prevailed in 1980.

54. This exercise has, therefore, both a positive and a cautionary conclusion. On the positive side, the model implies that reductions in the tax burden would raise employment. Moreover, the application of broadly accepted estimated parameters suggests that this effect is economically significant, as illustrated by the episode of tax increases in the 1980s. The cautionary conclusion is that rebalancing taxes between social security contributions and income taxes is likely to have only a very limited impact on employment, since in equilibrium both affect total labor costs in the same way. Put differently, direct tax cuts must be broad based if they are to raise employment significantly. Looking forward, tax policy has a substantial way to go to reverse the negative employment effects of past policies.

References

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1

Prepared by Marcello Estevão.

2

Labor cost is labor income plus employers’ SSC. Labor income includes earnings of dependent and self-employed workers. Individuals’ SSC include SSC of self-employed workers as well as a small residual from special contributions and from workers who are out of the labor force. It should be emphasized that, here and elsewhere in this chapter, references to the impact of the tax changes on firms and workers do not necessarily refer to the ultimate incidence, which depends on a variety of factors. To illustrate with an extreme but clear-cut example, if labor supply were perfectly inelastic and labor markets competitive, then a reduction of either employers’ or employees’ SSC would ultimately benefit the employee. The size of the wedges, however, does not depend on the ultimate incidence.

3

Evidence of wage dispersion across firms can be found in the Bilan Social, published by the National Bank of Belgium.

4

The model can be modified to accommodate the wage norm, set either by the government or by negotiations at a central level. So modified, the model assumes firms and unions bargain over deviations from the exogenously given wage norm and generates similar conclusions to the more standard version derived here.

5

For a given size of the labor force, the change in the logarithm of employment will be quite close to the percentage point change in the ratio of employment to the labor force if the latter is not much bigger than employment. This assumption is reasonable for Belgium. Obviously, the approximation will be worse if the labor force varies a lot when employment changes.

6

The model could be modified to include the utilization of intermediate products in the production function (Bruyne et al., 1998), a long-run equilibrium condition where firms are allowed to choose the stock of capital (Cotis et al., 1996) or inter-temporal decisions to generate an equation for equilibrium output growth (Daveri and Tabellini, 2000). The basic effects of tax changes on the level of equilibrium employment would not substantially change. Also, marginal tax rates could have an effect on wages and employment independently of the average tax rates. For example, a higher level of tax progressivity implies that wage increases are less valuable and so, in standard union models, wages are reduced (Lockwood and Manning, 1993).

7

Note that changes in the rate of employers’ SSC, in individual SSC, and in direct income taxes will all have the same effect on the equilibrium level of employment. This symmetry is also present in the empirical model for Belgium estimated by Jeanfils (2000).

8

To conform with the model, the tax rates used here—td, te and tss—are defined as individual income tax receipts, and employers’ and employees’ SSC as a proportion of labor income and not of labor costs.

9

Note that in the model prices are determined as a markup over marginal costs and therefore an increase in employers’ SSC will tend to raise prices and offset in real terms some of the wage increase, and thus reduce the impact on employment. This effect is not taken into account in the simulation.

10

Several of the policies aiming to reduce the tax wedge in the 1990s were directed toward low-skilled workers. Their positive effect could have been greater if the cost-elasticity of demand for this type of worker were larger than the average elasticity used here. However, even if the elasticity of demand for low-skilled workers were twice the one used here and the whole reduction in the rate of SSC were directed to them, the positive effect of the overall package on aggregate employment would still have been small.

Belgium: Selected Issues
Author: International Monetary Fund