LABOR TAX-REFORM, EMPLOYMENT AND INTERGENERATIONAL DISTRIBUTION

A simulation model of an open economy with a unionized labour market i s set up to analyze the effects of a labour tax reform which combines cuts in marginal tax rates with measures to broaden the tax base. We f ind that such a reform will be contractionary and welfare reducing if unions set wage rates with the purpose of maximizing the after-tax inc ome of their members. By contrast, if unions also allow for the disuti lity of work of their members, the reform will stimulate employment, i ncrease the welfare of all generations, and redistribute welfare in fa vour of future generations.