Relation between tax wedge and employment rate: The case of OECD countries

Abstract

The paper investigates the relationship between tax wedge and employment rate in thirty-six OECD countries for the period 2000-2020. The aim of this paper is to identify how tax wedge indicators affect the employment level in these economies. The empirical research includes correlation analysis and panel regression to determine character and intensity of nexus among observed variables. The results of Hausman represent that a random effects model is adequate for estimating the effect of tax wedge on the employment rate in selected countries. The model results show a negative correlation between these variables, as well as, that tax wedge indicators have a negative impact on the employment rate in OECD countries for the observed period. The empirical findings manifest that a 1% increase in the average tax wedge leads to a lower employment rate of 0.33% in OECD economies.