# Tax wedge in labour market

I'm reading a book ( Macroeconomics - Institutions, Instability and the Financial System ) and on page 62, the authors define tax wedge as the "difference between the real consumption wage and the real product wage". Should I understand this as a subtraction?

The real consumption wage is measured as $\frac{W}{P_c}$, where $W$ is the after-tax wage that employees receive, and $P_c=P(1+t_v)$ with $t_v$ being the indirect tax rate (VAT, etc).

The real product wage is the wage paid by firms to workers, and is measured by $W^{gross}/P$ where $W^{gross}=W(1+t_d)$ with $t_d$ being the direct tax rate(social securities contributions, etc).

Any help would be appreciated

• Sounds more like a ratio than a difference. I think the sentence is the book is misleading. Other uses of tax wedge are also usually ratios. (Googling "tax wedge" finds a few.) Nov 17 '15 at 13:21