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This chapter has set out in detail the models which are employed below in order to analyse the labour market effects of changes in tax rates and in alterations in the tax structure. The fundamental mechanisms underlying the different approaches have been pointed out. Moreover, vital assumptions have been emphasised. By delineating the models which are used for the subsequent analyses, implicitly statements have also been made about topics or aspects which this study does not cover. For example, all workers and firms are identical ex­ ante. However, ex-post differences are allowed for, inter alia, if unemploy­ ment occurs or if some firms have to close down. These restrictions indicate areas of future research insofar as that the findings for homogeneous workers or firms yield an unambiguous proposal for changes in tax rates or the tax structure in order to promote employment. This is because it would be desir­ able for tax policy to know whether the predicted effects also hold in a world with ex-ante heterogeneity. Furthermore, the product market has not played a role. Therefore, repercussions from labour markets outcomes on product demand - and vice versa - are absent. 55 Moreover, neither the process of capital accumulation, be it physical or human capital, nor substitution pos­ sibilities between labour and capital in the firms' production function are taken into account. Finally, international competition is not modelled.

Collective bargaining --- Labor supply --- Unemployment --- Wages --- Mathematical models. --- Effect of taxation on --- Taxation --- Efficiency wage theory --- Public finance. --- Labor economics. --- Microeconomics. --- Public Economics. --- Labor Economics. --- Price theory --- Economics --- Cameralistics --- Public finance --- Public finances --- Currency question

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It has been well established that the wages of individual workers react little, especially downwards, to shocks that hit their employer. This paper presents new evidence from a unique survey of firms across Europe on the prevalence of downward wage rigidity in both real and nominal terms. The authors analyse which firm-level and institutional factors are associated with wage rigidity. The results indicate that it is related to workforce composition at the establishment level in a manner that is consistent with related theoretical models (e.g. efficiency wage theory, insider-outsider theory). The analysis also finds that wage rigidity depends on the labour market institutional environment. Collective bargaining coverage is positively related with downward real wage rigidity, measured on the basis of wage indexation. Downward nominal wage rigidity is positively associated with the extent of permanent contracts and this effect is stronger in countries with stricter employment protection regulations.

Bargaining power --- Central banks --- Collective bargaining --- Efficiency wage theory --- Employment --- Environment --- Environmental Economics & Policies --- Income --- Labor Markets --- Labor markets --- Labor Policies --- Labour --- Labour markets --- Macroeconomics and Economic Growth --- Markets and Market Access --- Nominal wages --- Real income --- Real wages --- Rents --- Rigid wages --- Skilled workers --- Social Protections and Labor --- Unemployment --- Wage flexibility --- Wage increases --- Wage rigidities --- Wage rigidity --- Wages