TECHNOLOGY AT WORK

February 2015
Citi GPS: Global Perspectives & Solutions
85
up in the pockets of the workers. However, in practice, the so-called tax wedges —
the difference between gross labour costs and ‘take-home pay’ — can be very
large, particularly in a number of European countries. The tax wedge is composed
of employers’ and employees’ social security contributions and personal income
taxes. In Belgium, France or Hungary it is around a staggering 50% of total labour
costs for low-wage earners (i.e. earning 67% of the average wage) according to
OECD data. Significantly lowering tax wedges can be an effective way to boost
take-home pay (for unchanged gross labour costs) or raise employment (if gross
labour costs fall) and likely a combination of the two.
Figure 62. Change in tax wedge between 2007 and 2012 (for single person at 67% of average earnings, with two children)
6
Percentage Points
4
2
0
-2
-4
-6
-8
-10
Source: OECD
The UK has made efforts to lower the tax
wedge, but it has increased over the past 5
years in more than half the OECD countries
ALMPs are aimed at helping and providing
incentives for the unemployed to find gainful
employment
This is indeed what the UK has done in recent years. Between 2007 and 2013, the
UK lowered the tax wedge by almost 9 percentage points for low-wage earners
(meaning that low-wage earners now keep 9 percentage points more of their wages
than previously), more than in that in any other OECD economy. In fact, in roughly
half the OECD countries, the tax wedge rose over this period, including in some of
the fiscally challenged countries such as Spain, Greece, or Italy, but also in Japan
and the US (Figure 62). The fall in tax wedges is surely not the only reason why job
growth in the UK has been above the industrial country norm in recent years, but it
has surely contributed.
Active labour market policies (ALMPs, such as job placement services, benefit
administration, special labour market programmes and training) instead are aimed
at helping and providing incentives for the unemployed to find gainful employment.
Active labour market policies are an integral part of the ‘flexicurity’ model of labour
markets of the Scandinavian countries and there is some evidence that, if done
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