Allocation with l

Allocation without l

High

Middle

Subsistence

High

Middle

Labour units Sheltered

6.53

53.08

9.57

7.07

54.73

Labour units Exposed

8.47

21.91

0.43

7.93

20.27

Labour units Total

15

75

10

15

75

Wage

0.88

0.33

0.19

0.74

0.28

National Income Share

0.33

0.62

0.05

0.34

0.66

[Note: Using unrounded data on the wages, the high/low wage ratio
in the first regime is 2.69, and in the second regime 2.60.]

Conclusion

By proper choice of functions and parameters we have succeeded in reproducing and hence illustrating the Van Schaaijk observation & analysis of the differential reaction of the exposed and sheltered sectors on incomes policy. As Van Schaaijk found, the sheltered sector loses most, and it would be optimal to have wages reflect productivity. And similarly, this can be supported by tax policy. Whereas Van Schaaijk commented on the Dutch policy of the uniform containment of wage growth, we have concentrated on the minimum wage - as is more applicable for the OECD. Indeed, if the whole of the OECD would try to copy the ‘Dutch model’, then this would amount to trying to export unemployment to each other, and a thing like that surely would not work.

32. Dynamic optimality

The Phillipscurve revisited

In chapter 25, the ‘more sophisticated view’ section, we mentioned that Graafland (1990b) elaborated on Hersoug (1984), and recently again in Graafland & Huizinga (1999). The approach here is a Nash solution to wage bargaining. The approach causes that marginal tax rates penalize wage demands and increase employment - contrary to the common thought that statutory marginal tax rates reduce incentives and hence reduce employment.

We ourselves forwarded the novel insight of the ‘dynamic marginal tax rate’: saying that marginal tax rates should be better measured by also including expectations on parameter changes and economic growth.

The question now arises how these two approaches combine. The Nash approach uses partial derivatives, while the dynamic approach uses total derivatives. If we would take the total derivative of the Nash solution, it might well be that statutory marginal tax rates show an effect again that is more in line with the conventional view. The four possible combination cases are shown in Table 11.

Table 11: Two marginal approaches for two Phillipscurves