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Atlanta Marriott Marquis, A708
American Economic Association
Labor Markets and the Macroeconomy
Friday, Jan. 4, 2019 8:00 AM - 10:00 AM
- Chair: Marianna Kudlyak, Federal Reserve Bank of San Francisco
Flexible Retirement and Optimal Taxation
AbstractThis paper studies optimal income taxes and retirement benefits in a life-cycle model with an intensive margin of labor supply and an endogenous retirement age. The government insures and redistributes resources across individuals who privately observe persistent shocks to their productivity. In this environment, the optimal labor tax is hump-shaped in age, unlike in existing models with no endogenous retirement choice, in which the optimal tax is everywhere increasing. Because of the retirement margin, the total Frisch elasticity of labor supply increases with age. This elasticity effect flattens the labor tax for old workers relative to the model without an extensive margin. In addition, as high-productivity workers retire later than low-productivity workers, the distribution of productivity in the labor force features, over time, a higher mean and lower variance than in the general population. This novel composition effect pushes for a labor tax that declines for old workers. Optimal policy balances these effects with the insurance benefits of taxation, yielding the hump-shape in tax rates. In numerical simulations, the optimum achieves sizable welfare gains that approximately optimal age-dependent taxes fail to capture under the current US Social Security system. Yet, an optimal combination of age-dependent linear taxes with increasing-in-age delayed retirement credits generates welfare gains that are close to those from the optimum.
How Do Households Cope with the Loss of Earnings Following Job Loss?
AbstractWe present new evidence on how households adjust to income drops following job loss. Using data from the 1996 through 2008 panels of the Survey of Income and Program Participation, we show that most households are unlikely to be able to avoid substantial reductions in consumption during very long spells of unemployment. Neither drawing down of financial assets; or increasing debt, increased receipt of social welfare transfers, increased earnings of other household members, nor other methods of adjustment are adequate by themselves. Even taking them all together very few households avoid significant drops in consumption. Although most households do not have the financial capacity to smooth consumption over long spells of unemployment, many of those with substantial asset holdings do not draw them down to the extent that one might expect. To gauge the extent to which the observed data is consistent with plausible optimizing behavior, we construct a simple life-cycle consumption model. Uncertainty regarding the duration of ongoing unemployment spells, and the possibility of experiencing future spells in the near future, implies that household will not aim to fully deplete their financial assets. Moreover, the tendency for long spells to end in reemployment with substantially reduced earnings implies that households’ optimal consumption path may be pushed downward. Our preliminary results suggest that a substantial fraction of households undergoing a long spell of unemployment experience a decrease in consumption that is greater than optimal. The implied welfare losses to these households indicates that the aggregate welfare cost of the increase in the incidence of long unemployment spells during deep recessions is first order and larger than commonly recognized. The results also suggest that an increase in the incidence of long unemployment spells would be expected to be associated with an increase in the sensitivity of aggregate
New Evidence on Cyclical Variation in Average Labor Costs in the United States
AbstractUsing BLS establishment-job data for 1982-2018, we show that average real straight-time wages, employers’ total real benefit expenditure, and overall real labor cost, which are measured from the perspective of firms have become more countercyclical after the financial crisis and the subsequent Great Recession. This is also the case for major employer-paid benefits, e.g., health insurance and social security, though not all benefit expenditures’ cyclicalities have changed the same way. We also find that, consistent with prior literature, earnings that include straight-time wages, bonuses, and overtime earnings were procyclical before the Great Recession; yet since then, the earnings have also become more countercyclical. The increasing countercyclicality of all of these measures of labor costs is largely attributable to periods with below-trend GDP rather than those with above-trend GDP.
Taxing Families: The Impact of Child-related Transfers on Maternal Labor Supply
AbstractChildbirth causes persistent gender differences in labor force participation and the difference in employment rates of married women with and without pre-school children varies substantially across countries. To what extent can child-related transfers account for this differential? To answer this question, I develop a life-cycle model of joint labor supply, in which female human capital evolves endogenously and a fraction of households has access to informal childcare. I calibrate the model to the US and Denmark, two countries in which the gap in employment rates of women with and without pre-school children differs in sign and magnitude: the gap is 13.2\% in the US and -3.7\% in Denmark. After taking the labor income tax treatment of married couples and variation in childcare fees into account, I find that child-related transfers are key to explaining the positive gap in the US and the negative gap in Denmark. I show that this mechanism is quantitatively important to account for variation in the maternal participation gap across other European countries as well.
- E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy