| Sumario: | The objective of this article is to investigate the effect of tax and social contributions reforms on employment in Macedonia, through estimating a labour demand function over the period 1998:Q1–2010:Q3. The results are used to establish a foundation for an evidence-based policy for increasing employment in a country with high unemployment, while recognising the reality of budget constraints. The article disaggregates the total tax wedge into an income tax wedge and a social contributions wedge, in order to test the argument that the main burden on labour in transition economies stems from social contributions and not from income taxation, mainly due to the dominance of unskilled jobs in those countries. We also impose a control for the introduction of the gross wage concept in 2009, which is said to have had the effect of reducing the informal economy. We find that the reduction of social contributions has a significant effect on employment in Macedonia, ranging from 0.9 to 3.1 percentage points. The effect of the income tax wedge is found to be insignificant. Moreover, the estimates relating to the gross wage concept and the associated measures provide some evidence for the view that the reform generated a transfer from the informal economy into formal employment, thus most probably shrinking the grey economy in the country.
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