CAN TAX WEDGE AFFECT LABOR PRODUCTIVITY?. A TSLS FIXED MODEL ON OECD PANEL DATA

This paper studies the econometric relationship between labor productivity and tax wedge by using two-stage least square (TSLS) fixed effect model on two panel data of OECD countries to address endogeneity problem. I use two response variables, i.e., the growth rate of GDP per hour worked and the log of value added per hour worked for total manufacturing industry in 1997 dollar from two data sources, to verify whether the estimates of the effect of tax wedge are consistent each other. I do find that they are consistent and one percentage increase in tax wedge can lead to about 0.09 percentage decrease in labor productivity growth rate.tax wedge, labor productivity, instrument variable estimation, fixed effect model, welfare state