The Aging of the Baby Boomers: Demographics and Propagation of Tax Shocks
- American Economic Journal: Macroeconomics (Forthcoming)
We study how the changing demographic composition of the U.S.
labor force has affected the response of the unemployment rate to
marginal tax rate shocks. Using narratively identified tax changes
as proxies for structural shocks, we establish that the responsiveness of the unemployment rates to tax changes varies significantly
across age groups: the unemployment rate response of the young
is nearly twice as large as that of the old. This heterogeneity is
the channel through which shifts in the age composition of the labor force impact the response of the unemployment rate to tax cuts.
We find that the aging of the baby boomers considerably reduces the
effects of tax cuts on aggregate unemployment.
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