Heterogeneity, transfer progressivity, and business

Jang, Youngsoo, Sunakawa, Takeki and Yum, Minchul (2023) Heterogeneity, transfer progressivity, and business Centre for Economic Policy Research

Abstract

This paper studies how transfer progressivity influences aggregate fluctuations when interacting with household heterogeneity. Using a simple static model of the extensive margin labor supply, we analytically characterize how transfer progressivity influences differential labor supply responses to aggregate conditions across heterogeneous households. We then build a quantitative dynamic general equilibrium model with both idiosyncratic and aggregate productivity shocks and show that it delivers moderately procyclical average labor productivity and a large cyclical volatility of aggregate hours relative to output. A counterfactual exercise shows that higher progressivity achieved by a faster phase-out of transfers would strengthen our mechanism. Finally, we provide suggestive empirical evidence on the heterogeneity of employment responses across the wage distribution.

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Contributors

Author: Minchul Yum

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