Optimal Taxation and (Female)-Labor Force Participation over the Cycle

Jung, Philip (2007): Optimal Taxation and (Female)-Labor Force Participation over the Cycle.

Abstract

Optimal labor tax results over the cycle are, quantitatively, typically driven by an estimate of the intratemporal elasticity of substitution that governs the reaction of hours worked to business cycle shocks and tax rate changes. A recent literature tries to decompose this intratemporal elasticity into its main components, the "Ins and Outs of Unemployment" (Shimer(2007)) to emphasize the importance of the extensive margin. This paper provides a model that a.) endogenizes all transition rates including firings and quits on the job as well as movements in and out of inactivity, b.) explains the fluctuations in these rates quantitatively while allowing for differences across gender and c.) remains tractable and open to Ramsey-optimal policy.

We estimate the model on US-data for the years 1970:1 to 2004:4 and show that the model predicts all labor market flows very well. We apply our model to show that observed labor tax rates over the cycle correspond fairly closely to the implied Ramsey-optimal ones.

• Item Type: MPRA Paper
• Language: English
• Keywords: search theory, unemployment, hours worked
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity

References

Aguiar, M., and E. Hurst (2007): “Measuring Trends in Leisure: The Allocation of Time Over Five Decades,” Quarterly Journal of Economics, forthcoming. Alesina, A., and A. Ichino (2007): “Gender Based Taxation,” Mimeo. Anderson, S. P., A. de Palma, and J.-F. Thisse (1992): Discrete Choice Theory of Product Differentiation. MIT Press, Cambridge, Massachusetts. Arsenau, D. M., and S. Chugh (2006): “Ramsey Meets Hosios: The Optimal Capital Tax and Labor Market Efficiency,” International Finance Discussion Papers 870. Atkeson, A., C. Chari, and P. Kehoe (1999): “Taxing Capital: A Bad Idea,” Federal Reserve Bank of Minneapolis Quarterly Review, 23. Benigno, P., and M. Woodford (2006a): “Linear-Quadratic Approximation of Optimal Policy Problems,” mimeo. (2006b): “Optimal Taxation in an RBC model: A linear-quadratic approach,” Journal of Economic Dynamics and Control, 30, 1445–1489. Blanchard, O., and J. Gali (2008): “Labor Markets and Monetary Policy: A New-Keynesian Model with Unemployment,” mimeo. Chamley, C. (1986): “Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives,” Econometrica, 54, 607–622. Chari, V., and P. Kehoe (1999): “Optimal Fiscal and Monetary Policy,” in Handbook of Macroe- conomics, ed. by J. Taylor, and M. Woodford, vol. 1, pp. –. Elsevier. Costain, J., and M. Reiter (2005a): “Business Cycles, Unemployment Insurance, and the Cali- bration of Matching Models,” Mimeo. Universidad Pompeu Fabra. Barcelona. (2005b): “Stabilization versus Insurance: Welfare Effects of Procyclical Taxation under Incomplete Markets,” Mimeo. Universidad Pompeu Fabra. Barcelona. den Haan, W., G. Ramey, and J. Watson (2000): “Job Destruction and Propagation of Shocks,” American Economic Review, 90, 482–498. Fallick, B., and C. A. Fleischman (2004): “Employer to Employer Flows in the U.S. Labor Market: The Complete Picture of Gross Worker Flows,” mimeo, volume = , number = , pages = , abstract = . Fujita, S., and G. Ramey (2007): “Reassessing the Shimer Facts,” Federal Reserve Bank of Philadel- phia, Working Paper No.07-02. Garibaldi, P., and E. Wasmer (2005): “Equilibrium Search Unemployment, Endogenous Partici- pation and Labor Market Flows,” Journal of European Economic Association, 3 (4), 851–882. Gomme, P., and P. Klein (2006): “Second-order Approximation of Dynamic Models without the Use of Tensors,” mimeo. Gomme, P., and P. Rupert (2007): “Theory, measurement, and calibration of macroeconomic models,” Journal of Monetary Economics, 54. Haefke, C., and M. Reiter (2006): “Endogenous Labor Market Participation and the Business Cycle,” IZA Discussion Paper No.2029. Hagedorn, M., and I. Manovskii (2006): “The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited,” mimeo; University of Pennsylvania. Hall, R. E. (2005): “Employment Fluctuations with Equilibrium Wage Stickiness,” American Eco- nomic Review, 95(1), 50–65. Hall, R. E., and P. R. Milgrom (2007): “The Limited Influence of Unemployment on the Wage Bargaining,” mimeo, Stanford University. Judd, K. (1985): “Redistributive Taxation in a Simple Perfect Foresight Model,” Journal of Public Economics, 28, 59–83. Jung, P. (2005): “Unemployment, Capital and Hours: on the Quantitative Performance of a DSGE Labor Market Model,” Mimeo. Goethe University, Frankfurt. (2008): “Optimal Taxation and (Female)-Labor Force Participation in the long Run,” Mimeo. Jung, P., and K. Kuester (2007): “Unemployment Fluctuations Revisited,” Mimeo. Goethe Uni- versity, Frankfurt. McGratten, E., R. Rogerson, and R. Wright (1997): “An Equilibrium Model of the Business Cycle,” Internation Economic Review, 38. Nagypal, E. (2005): “Worker Reallocation over the Business-cycle: The Importance of Job-toJob Transitions,” mimeo. Ramey, V. (2007): “How much has Leisure Really Increased Since 1965?,” mimeo. Shimer, R. (2005): “The Cyclical Behavior of Equilibrium Unemployment, Vacancies, and Wages: Evidence and Theory,” The American Economic Review, 95(1), 25–49. (2007): “Reassessing the Ins and Outs of Unemployment,” mimeo.