Lower tax progression, longer hours and higher wages

The impact of tax reforms that decrease income tax progression is analysed in an equilibrium search model with wage bargaining and endogenous individu al working hours. Working hours are either bargained together with the hour ly wage (case 1) or determined solely by workers after bargaining over the wage (case 2). In both cases reducing tax progression increases working hou rs of employed and more interestingly, unambiguously increases wages and un employment. Wages and unemployment rise more and working hours and producti on less in case 1 compared to case 2, probably making case 2 countries best suited for such tax reforms.