I tend to regard this approach as an example of academic excess. This may be an error on my side, but let us look at some of the arguments: 10% of the European labour force is unemployed, hence Europeans apparently shirk a lot ! And employers are so dumb that they cannot think of cheap ways to determine productivity, like setting standards and such. Agreed, shirking is undoubtedly a phenomenon, and eventually the superior economic model will include a subtle relationship between wage, effort and productivity to determine the last digits, but all this is less relevant for the Great Stagflation and the need for an Economic Supreme Court.
A more sophisticated view
Graafland (1990) introduced another approach at the Dutch Central Planning Bureau, and he refers here to Hersoug (1984). The Phillipscurve here is derived using a model of wage bargaining between unions of employers and employees. The approach is adopted by Gelauff (1992) on the CPB model MIMIC, Gelauff & Graafland (1994). It recently is refined by Graafland and De Mooij (1998), Bovenberg, Graafland and De Mooij (1998), Jongen and Graafland (1998), Graafland & Huizinga (1999), [77] Graafland and Nibbelink (1999), Oers, De Mooij, Graafland and Boone (1999), and De Mooij (1999). In this approach, a higher statutory marginal rate actually increases employment, instead of reducing it as the Simple View and many standard Phillipscurves would hold. The mechanism is as follows:
· A higher marginal rate (under constant average) penalizes wage demands, lowers such demands, reduces (wage) inflation and thus increases employment.
· A higher average rate (under constant marginal) causes compensating wage demands at the margin, and reduces employment.
These properties actually are well known, as they are consistent with analyses concerning a Tax-based Incomes Policy (TIP). For example the Congressional Budget Office (1977:119):
“In recent years there have been proposals to use tax incentives and other schemes to encourage more moderate price behavior. (...) Rather than overriding market forces, these newer proposals attempt to take advantage of market incentives by making moderate price and wage increases a matter of self-interest for firms and employees. The best known of these proposals involves tax incentives to reward or penalize wage decisions that deviate from some established standard.”
This view however still does not take account of the dynamic marginal rate. There are also the issues of labour heterogeneity and optimal taxation that we have encountered in discussing the Simple View, but that have not had sufficient attention. These issues will be discussed below.
Confusions
Given more than one view, there is scope for confusion. This has in fact occurred.