The tax wedge is a significant part of total labour costs, which creates a differencebetween the gross wage and the net take-home pay. The tax wedge receives much attention inresearch, since it is perceived that high labour tax wedge has detrimental effects on labour marketoutcomes and causes higher levels of unemployment. The paper addresses the following issues: theeffects of an increase or decrease of tax wedge on the labour market; the tax burden on labour inthe Republic of Macedonia and the reductions of personal income tax and social contributionsrates; an international comparison of the tax wedge and the position of Macedonia. A hierarchicalcluster analysis was performed on 43 countries (OECD and EU members and EU candidatecountries), resulting in three groups of countries classified according to their tax wedge,employment rate and unemployment rate. We found that OECD and EU countries can be classifiedinto two groups, one with high tax wedge, high unemployment rate and low employment rate, andthe other one with opposite characteristics. Macedonia belongs to the third group of countries withpoorest labour market outcomes, while the average tax wedge is somewhere between those of theother two clusters. The results can serve the professional and scientific public in analyzing thelabour market flexibility; as well as the relevant state institutions and policy makers, inconceptualization of appropriate policies aimed at changing taxes that burden wages. .Keywords: tax wedge, labour costs, hierarchical cluster analysis, unemployment.
