Hostname: page-component-cd9895bd7-p9bg8 Total loading time: 0 Render date: 2024-12-28T11:00:09.040Z Has data issue: false hasContentIssue false
  • English
  • Français

GENERAL EQUILIBRIUM FEEDBACK REGARDING THE EMPLOYMENT EFFECTS OF LABOR TAXES

Published online by Cambridge University Press:  22 March 2019

Minchul Yum
Minchul Yum*
Affiliation:
University of Mannheim
*
Address correspondence to: Minchul Yum, L 7, 3–5, P09, Department of Economics, University of Mannheim, 68161 Mannheim, Germany. e-mail: [email protected]. Phone: +49 (0)621-181-1853.
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

A higher labor tax rate increases the equilibrium real interest rate and reduces the equilibrium wage in a heterogeneous-agent model with endogenous savings and indivisible labor supply decisions. I show that these general equilibrium (GE) adjustments, in particular of the real interest rate, reinforce the negative employment impact of higher labor taxes. However, the representative-agent version of the model, which generates similar aggregate employment responses to labor tax changes, implies that GE feedback is neutral. The cross-country panel data reveal that the negative association between labor tax rates and the extensive margin labor supply is significantly and robustly weaker in small open economies where the interest rate is less tightly linked to domestic circumstances. This empirical evidence supports the transmission mechanism of labor tax changes for employment in the heterogeneous-agent model.

Keywords

Labor Income TaxLabor Supply ElasticityGeneral EquilibriumCross-Country Panel
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 8 , December 2020 , pp. 2012 - 2032
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© 2019 Cambridge University Press

Footnotes

I thank Lee Ohanian (co-editor) and two anonymous referees for helpful comments that improved the paper substantially. For constructive suggestions and discussions, I am also grateful to Yongsung Chang, Georg Duernecker, Tom Krebs, Tim Lee, Jim MacGee, Dmitry Matveev, Yongseok Shin, Saverio Simonelli, Takeki Sunakawa, and Jinhee Woo as well as seminar participants at the University of Mannheim, the North American Summer Meeting of the Econometric Society in Philadelphia, 2016 KAEA–KEA International Conference, Asian Meeting of Econometric Society in Kyoto, and 2016 KIPF–KAEA Joint Conference and Kobe University. I gratefully acknowledge funding by the German Research Foundation (DFG) through CRC TR 224. This paper uses data from the Eurosystem Household Finance and Consumption Survey. An earlier version of this paper was titled “On the Employment Effects of Taxes: A General Equilibrium Analysis.”

References

Aiyagari, S. R. (1994) Uninsured idiosyncratic risk and aggregate saving. The Quarterly Journal of Economics 109, 659–684.CrossRefGoogle Scholar
Alonso-Ortiz, J. and Rogerson, R. (2010) Taxes, transfers and employment in an incomplete markets model. Journal of Monetary Economics 57, 949–958.CrossRefGoogle Scholar
Bick, A. and Fuchs-Schündeln, N. (2017) Taxation and labour supply of married couples across countries: A macroeconomic analysis. The Review of Economic Studies 85, 1543–1576.CrossRefGoogle Scholar
Chakraborty, I., Holter, H. A. and Stepanchuk, S. (2015) Marriage stability, taxation and aggregate labor supply in the US vs. Europe. Journal of Monetary Economics 72, 1–20.CrossRefGoogle Scholar
Chang, Y. and Kim, S.-B. (2006) From individual to aggregate labor supply: A quantitative analysis based on a heterogeneous agent macroeconomy. International Economic Review 47, 1–27.CrossRefGoogle Scholar
Chang, Y. and Kim, S.-B. (2007) Heterogeneity and aggregation: Implications for labor-market fluctuations. American Economic Review 97, 1939–1956.CrossRefGoogle Scholar
Chetty, R., Guren, A., Manoli, D. and Weber, A. (2012) Does indivisible labor explain the difference between micro and macro elasticities? A meta-analysis of extensive margin elasticities. In: NBER Macroeconomics Annual 2012, Volume 27, University of Chicago Press.Google Scholar
Chinn, M. D. and Ito, H. (2006) What matters for financial development? Capital controls, institutions, and interactions. Journal of Development Economics 81, 163–192.CrossRefGoogle Scholar
Domeij, D. and Heathcote, J. (2004) On the distributional effects of reducing capital taxes. International Economic Review 45, 523–554.CrossRefGoogle Scholar
Erosa, A., Fuster, L. and Kambourov, G. (2016) Towards a micro-founded theory of aggregate labour supply. The Review of Economic Studies 83, 1001–1039.CrossRefGoogle Scholar
Guner, N., Kaygusuz, R. and Ventura, G. (2012) Taxation and household labour supply. Review of Economic Studies 79, 1113–1149.CrossRefGoogle Scholar
Hansen, G. D. (1985) Indivisible labor and the business cycle. Journal of Monetary Economics 16, 309–327.CrossRefGoogle Scholar
Huggett, M. (1993) The risk-free rate in heterogeneous-agent incomplete-insurance economies. Journal of Economic Dynamics and Control 17, 953–969.CrossRefGoogle Scholar
Imrohoroğlu, A. (1989) Cost of business cycles with indivisibilities and liquidity constraints. Journal of Political Economy 97, 1364–1383.CrossRefGoogle Scholar
Karabarbounis, M. (2016) A road map for efficiently taxing heterogeneous agents. American Economic Journal: Macroeconomics 8, 182–214.Google Scholar
Khan, A. and Thomas, J. K. (2008) Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics. Econometrica 76, 395–436.CrossRefGoogle Scholar
Krueger, D., Mitman, K. and Perri, F. (2016) Macroeconomics and household heterogeneity. Handbook of Macroeconomics 2, 843–921.CrossRefGoogle Scholar
Krusell, P., Mukoyama, T., Rogerson, R. and Şahin, A. (2008) Aggregate implications of indivisible labor, incomplete markets, and labor market frictions. Journal of Monetary Economics 55, 961–979.CrossRefGoogle Scholar
Krusell, P., Mukoyama, T., Rogerson, R. and Şahin, A. (2010) Aggregate labor market outcomes: The roles of choice and chance. Quantitative Economics 1, 97–127.Google Scholar
Krusell, P. and Rios-Rull, J.-V. (1999) On the size of US Government: Political economy in the neoclassical growth model. American Economic Review 89, 1156–1181.CrossRefGoogle Scholar
Krusell, P. and Smith, A. A. Jr. (1998) Income and wealth heterogeneity in the macroeconomy. Journal of Political Economy 106, 867–896.CrossRefGoogle Scholar
Ljungqvist, L. and Sargent, T. J. (2008) Taxes, benefits, and careers: Complete versus incomplete markets. Journal of Monetary Economics 55, 98–125.CrossRefGoogle Scholar
McDaniel, C. (2007) Average tax rates on consumption, investment, labor and capital in the OECD 1950–2003. Unpublished Manuscript.Google Scholar
Ohanian, L., Raffo, A. and Rogerson, R. (2008) Long-term changes in labor supply and taxes: Evidence from OECD countries, 1956-2004. Journal of Monetary Economics 55, 1353–1362.CrossRefGoogle Scholar
Prescott, E. C. (2004) Why do Americans work so much more than Europeans? Federal Reserve Bank of Minneapolis Quarterly Review 28, 2–13.Google Scholar
Rogerson, R. (1988) Indivisible labor, lotteries and equilibrium. Journal of Monetary Economics 21, 3–16.CrossRefGoogle Scholar
Rogerson, R. (2008) Structural transformation and the deterioration of European labor market outcomes. Journal of Political Economy 116, 235–259.CrossRefGoogle Scholar
Rogerson, R. and Wallenius, J. (2009) Micro and macro elasticities in a life cycle model with taxes. Journal of Economic Theory 144, 2277–2292.CrossRefGoogle Scholar
Rouwenhorst, K. G. (1995) Asset pricing implications of equilibrium business cycle models. In: Cooley, T. F. (ed.) Frontiers of Business Cycle Research, pp. 294–330. Princeton, NJ: Princeton University Press.Google Scholar
Thomas, J. K. (2002) Is lumpy investment relevant for the business cycle? Journal of Political Economy 110, 508–534.CrossRefGoogle Scholar
Trabandt, M. and Uhlig, H. (2011) The Laffer curve revisited. Journal of Monetary Economics 58, 305–327.CrossRefGoogle Scholar
Yum, M. (2018) On the distribution of wealth and employment. Review of Economic Dynamics 30, 86–105.CrossRefGoogle Scholar
Supplementary material: PDF

Yum supplementary material

Online Appendix

Download Yum supplementary material(PDF)
PDF 74.3 KB