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The Welfare State and Competitiveness

Alberto Alesina and Roberto Perotti
The American Economic Review
Vol. 87, No. 5 (Dec., 1997), pp. 921-939
Stable URL: http://www.jstor.org/stable/2951333
Page Count: 19
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The Welfare State and Competitiveness
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Abstract

In all industrial countries, fiscal policy is increasingly about redistribution. In this paper, we study redistribution across different types of agents in a world characterized by the presence of labor unions and distortionary taxation. We 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. We find considerable empirical support for the model in a sample of 14 OECD countries.

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