Labour Tax Policies and Strategic Offshoring under Unionised Oligopoly

Abstract

In a model with a unionised immobile labour force we analyse how labour taxes and transfers towards unemployed workers are optimally chosen when a welfare maximising government faces oligopolistic and partly mobile firms. We consider two polar types of government: one whose objective consists of maximising the sum of domestic producer's and consumers' surplus and one that aims at maximising employed and unemployed workers' payoffs. We show that depending on the combination of foreign labour costs, the degree of domestic union bargaining power, and the sunk costs of relocation, the former type of government may choose to set taxes so as to induce an outward relocation of production.

Keywords: outward FDI, import competition, wage bargaining, oligopoly, labour taxation, redistribution, political economy

JEL Classification: H30, J30, J50, L13