Tax-and-transfer progressivity and business cycles
Tax-and-transfer progressivity and business cycles
This paper studies how tax-and-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 a degree of 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. Our quantitative exercises suggest that progressivity at the bottom of the income distribution shaped by the phasing out of transfers is key for these findings. Finally, we provide suggestive empirical evidence on the heterogeneity of employment responses across the wage distribution.
E21, E24, E32, H31, H53, Progressivity, business cycles, extensive margin labor supply, redistributive policies, targeted transfers
1367-1400
Jang, Youngsoo
616d2665-221f-4832-9861-7fb2b1388347
Sunakawa, Takeki
661d28fd-6269-4854-965c-47343c9bd478
Yum, Minchul
23e96e8e-0dbd-4b6a-b3d1-538ab7d008b4
November 2023
Jang, Youngsoo
616d2665-221f-4832-9861-7fb2b1388347
Sunakawa, Takeki
661d28fd-6269-4854-965c-47343c9bd478
Yum, Minchul
23e96e8e-0dbd-4b6a-b3d1-538ab7d008b4
Jang, Youngsoo, Sunakawa, Takeki and Yum, Minchul
(2023)
Tax-and-transfer progressivity and business cycles.
Quantitative Economics, 14 (4), .
(doi:10.3982/QE1568).
Abstract
This paper studies how tax-and-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 a degree of 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. Our quantitative exercises suggest that progressivity at the bottom of the income distribution shaped by the phasing out of transfers is key for these findings. Finally, we provide suggestive empirical evidence on the heterogeneity of employment responses across the wage distribution.
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Accepted/In Press date: 2 June 2023
Published date: November 2023
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Copyright © 2023 The Authors.
Keywords:
E21, E24, E32, H31, H53, Progressivity, business cycles, extensive margin labor supply, redistributive policies, targeted transfers
Identifiers
Local EPrints ID: 478404
URI: http://eprints.soton.ac.uk/id/eprint/478404
ISSN: 1759-7331
PURE UUID: 7efb0295-4495-4754-b516-edb64e55ea22
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Date deposited: 30 Jun 2023 16:33
Last modified: 12 Apr 2024 02:06
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Contributors
Author:
Youngsoo Jang
Author:
Takeki Sunakawa
Author:
Minchul Yum
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