The Welfare State and Competitiveness.

In all industrial countries, fiscal policy is increasingly about redistribution. In this paper, the authors study redistribution across different types of agents in a world characterized by the presence of labor unions and distortionary taxation. They show that an increase in transfers financed by distortionary taxation has nonlinear effects on unit labor costs relative to the other countries, depending on the degree of centralization of the wage-setting process in the labor market. The authors find considerable empirical support for the model in a sample of fourteen OECD countries. Copyright 1997 by American Economic Association.