Labor income

This paper studies the optimal behavior of labor-income taxation in a simple model with credit frictions. Firms’ borrowing to pay their wage payments in advance is constrained by the value of their collateral at the beginning of the period. The labor- income tax rate and the shadow value on the credit constraint lead to a wedge between the marginal product of labor and the marginal rate of substitution between labor and consumption. This paper suggests that while the notion of “static wedge smoothing” is carried over to this environment, it is achieved only through a volatile labor-income tax rate. As the shadow value on the financing constraint varies over the business cycle, tax volatility is needed in order to counter this variation and, thus, allow for “wedge smoothing”. In particular, the optimal labor-income tax rate is lower when the credit market is more tightened and higher when it is less tightened. Therefore, when firms are more credit-constrained and the demand for labor is reduced, optimal fiscal policy calls for boosting labor supply by lowering the labor-income tax rate. It is also shown that the optimal behavior of the labor-income tax rate that is discovered in this study is consistent with its historical behavior in the U.S.

This study documents the characterization of the hourly wages in Greater Buenos Aires from 1986 until 2006, particularly from the economic polarization perspective. The labor market is the main scenario in which inequalities and income poles emerge 3 . The reason could be justified by the lack of capacity of other sources to explain the evolution of income inequality and income polarization. Firstly, household surveys have many deficiencies in capturing capital income, entrepreneur benefits and rents. 4 The Permanent Household Survey (Encuesta Permanente de Hogares or EPH) of Argentina is not an exception. Secondly, in Latin American countries there is evidence of the weakness of their redistributive schemes. 5 Thus, the governmental transfers could not be a feasible source to explain inequality and polarization changes. Lastly, the demographic structure could not seem a relevant explicative factor either. 6 Hence, differences in labor income would be the main sources to explain income inequality and income polarization changes documented in several studies that analyze the evolution of welfare measures such as household per capita income and adult equivalized income. 7 There are many other factors which could be independent of the labor market and could explain the inequality and polarization movements. In order to take them into account, we present and analyze several labor indicators which depend on demographic and

This study argues that economic news, which is unfavorable from the household’s point of view (e.g., news about increasing unemployment), leads to or increases employees’ con- cerns regarding their own job and labor income, because many factors that determine their individual future employment situation cannot be observed through other channels than the news media. If employees and their families are afraid of wage cuts or even job loss, their inclination for precautionary or buffer-stock saving increases and they reduce their consumption expenditures. Conversely, it is plausible to assume that favorable news (e.g., news about decreasing unemployment) leads to less uncertainty, less concerns, and more consumption. Of course, not all households revise their individual perceptions of income uncertainty when media coverage about the labor market or other relevant aspects becomes (un-)favorable, whether because their labor income is not affected by labor market dynam- ics and business cycles, or because they do not depend on labor income at all. However, for the majority of households, economic news likely has effects on their individual perceptions of income uncertainty. This influence should be detectable in aggregate numbers, which reflect the sum of individual consumption decisions.

The idea that the labor-income tax rate should be virtually constant over the business cycle is well-known in the literature since the partial-equilibrium complete- markets analysis of Barro (1979). Lucas and Stokey (1983), Chari, Christiano and Kehoe (1991, 1994) show that this result holds in a general-equilibrium setup that assumes neoclassical labor markets. In an economy with incomplete markets and no capital, Aiyagari et al. (2002) partially affirm the results of Barro (1979). Schmitt- Grohe and Uribe (2004a) show that the volatility of the labor tax rate is very small in a model with flexible prices (with and without imperfect competition in the product market), but it is significantly higher if prices are sticky. Recently, Arseneau and Chugh (2010) have shown that the result of labor tax smoothing does not hold in a model with labor market frictions. Labor tax volatility in their study is optimal in order to induce efficient fluctuations in the labor market by keeping distortions (or wedges) constant over the business cycle.

The second part of the paper was devoted to assessing whether some sectors of the economy would be especially well suited for improving the place of women in Guinea’s labor markets. The empirical results were obtained with a recent Guinea SAM. We found that an expansion in agriculture especially would lead to a higher income share for women over time. This is not surprising, given the fact that many women work in agriculture. From the point of view of the implementation of Guinea’s poverty reduction strategy, which places an emphasis on gender issues, the message is that investments in Agriculture, as well as other sectors such as Manufacturing, Livestock, Commerce, and Hunting, probably would help not only in reducing poverty, but also in reducing gender disparities in earnings in labor markets. Another result was that closing the gap between female and male labor incomes may also help growth in the specific sense that the sectors that comparatively favor female labor income are, on average, also the sectors that have a higher overall impact on economic growth through their multiplier effects. This is an interesting result that warrants further more detailed analysis.

The data in table 10.4 suggest that the share of total consumption allocated to food, human capital, and housing tends to be higher when the household head is female, and when more than [r]

The traditional life-cycle framework implies that one attends school in the first phase of life, after which one supplies labor and only learns from working (Ben-Porath, 1967; Mincer et al., 1974; Rubinstein and Weiss, 2006). A small branch of research documents irregularities to this framework, where one experiences delays in attending college after high school or experiences college stop-outs, which are marked by periods of labor market experiences in between spans of college enrollment (Light, 1995a,b; Monks, 1997; Dynarski, 1999; Seftor and Turner, 2002; Johnson, 2013; Arcidiacono, Aucejo, Maurel, and Ransom, 2016). These observations support the endogenous life-time higher education choices in my model, in addition to the empirical evidence I present. At the core, the optimal human capital investment profiles should equate marginal rate of return to the opportunity cost of funds in all periods (Cunha, Heckman, Lochner, and Masterov, 2006). These studies also identify factors leading to college decisions, such as financial constraint (Ozdagli and Trachter, 2011; Johnson, 2013) and an individual’s ability (Belley and Lochner, 2007; Arcidiacono, Bayer, and Hizmo, 2010; Stange, 2012). These studies form the theoretical and micro foundation for my modeling higher education decisions.

Migration may also result in a second wave of decreased labor supply, through the effect of remittances. Once the migrant settles in the host country, they may then decide to send proceeds gained through employment back home in the form of remittances. When this money is received, it can be treated as any other non-labor income, with the usual income and substitution effects resulting in increased consumption and leisure (if leisure is a normal good), resulting in an unambiguous effect on labor. Such theory, however, ignores the complexity of remittances, particularly if motivated by investment. Suppose, instead that the remittances are used for investment and business expansion purposes by the recipient, in which case remittances could actually be associated with increased labor if the result is a larger, stronger entrepreneurial effort. A negative relationship between remittances and labor supply predicted by simple economic models is not a foregone conclusion, and many scholars have attempted to measure both the direction and magnitude of this relationship.

A third and related issue is about the distortionary e¤ects of taxation. The previous discussion assumes the presence of a lump-sum tax, which is rarely available. In the case of distortionary taxes, the result that an income transfer leads to an increase in labor supply may no longer hold. Indeed, we …nd that an income transfer …nanced by a tax on wage income would lead to a decrease in labor supply. Similarly, an income transfer …nanced by a tax on asset income would cause a labor reallocation from R&D to production because the higher interest rate reduces the market value of inventions. As for a consumption tax, it will leave the equilibrium allocations of leisure, production labor and R&D labor unchanged. Therefore, none of these tax instruments deliver the original result. To restore the result, we can consider a tax on production-labor income. In this case, an income transfer …nanced by the production-labor-income tax would increase R&D labor and poten- tially improve country h’s welfare at a su¢ciently low discount rate or high R&D productivity. 21 Furthermore, it is not unrealistic for production-labor

and Rossi (1997) show that the optimality of a limiting zero tax applies to both labor income and capital income, as long as the technology for accumulating human capital displays constant return to scale in the stock of human capital and goods used. Correia (1996) argues that zero capital tax hinges on a complete set of ‡at-rate taxes for all production factors which guarantees the perfect shifts of the long-run burden of capital taxation to other production factors. When these other factors cannot be taxed directly, the optimality of the zero tax rate on capital income disappears. Atkeson, Chari and Kehoe (1996) shows that Chamley’s result still holds in models with heterogeneous agents, endogenous growth, small open economies or overlapping generations. By incorporating exogenous shocks to the production function or government purchases, Zhu (1992) and Chari, Christiano and Kehoe (1994) generalize the Chamley-Judd result to the stochastic version. Zhu (1992) establishes that for some special utility functions, if there exists a stationary Ramsey equilibrium, the Ramsey plan prescribes a zero ex ante capital tax rate that can be implemented by setting a zero tax on capital income. However, except for those preferences, Zhu (1992) shows that the ex ante capital tax rate should vary around zero. Chari, Christiano and Kehoe (1994) perform numerical simulations and conclude that there is a quantitative presumption that the ex ante capital tax is approximately zero. Whereas others researchers overturns the Chamley-Judd result by introducing particular mechanisms. Aiyagari (1995) shows that for the Bewley-type models with incomplete insurance market and borrowing constraints, the optimal tax rate on capital income is positive, even in the long run. The intuition behind a positive capital income tax rate is as follows: because of incomplete insurance market, there is a precautionary motive for accumulating capital. Furthermore, the possibility of being borrowing

We show the major income sources (i.e., labor income and public pension income) of individuals at different ages, and how these sources changed during the transition period. Figure 1 displays the labor income by age, normalized to the average income of a prime- age adult in the respective year. Labor income refers to the compensation of employees, and does not include income from self-employment, as very few eastern Germans were and are self-employed. In 1988, we see a very evenly distributed income profile over all ages. A steep rise in income before age 20 indicates that most people entered the labor market early; less than one percent of the population were enrolled in tertiary education (Statistisches Amt der DDR 1990). At around age 60, individuals started to exit the labor market, and thus no longer generated income from paid employment. The majority of eastern Germans were employed, even most mothers (Rosenfeld, Trappe, and Gornick 2004). The profiles for the later years are more compressed due to the longer periods of time spent in education, early retirement, and unemployment.

model with labor union to explore how declining union bargaining power (re‡ecting declining union membership in the data) a¤ects the wealth-income ratio. We …nd that declining union power decreases labor income share and increases the wealth-income ratio. This …nding is consistent with the above stylized facts and also with the negative relationship in Figure 4 between union membership density and the wealth-income ratio across OECD countries. 4

Table 7 shows that MEI ranks the three design of car- bon taxation the same way as MI. But when looking at the ranking of recycling schemes, it becomes evident that the LS recycling gets an important boost by considering the efficiency of consumption. Under per-capita lump-sum recycling, refunds are given in proportion to the size of the household, which is the same parameter that drives the economies of scale of consumption. At the same time, labor tax reduction tend to reach high-income households with their high shares of wages in overall income. These households tend to be bigger than low-income house- holds, but the relation between refunds and household size is not as direct as in the LS scenarios. The VAT recycling, finally, is worst at allocating refunds to large households: While LT distributed revenue in proportion to labor income (with high-income shares for the larger high-income households) VAT recycling gives compara- bly more to (on average smaller) low-income households with their bigger fossil fuel expenditure.

The model we use is a monetary one-sector model featuring two classes of households called workers and capitalists, a …nancial constraint that prevents workers from borrowing against wage earning and constant government revenue (transfer) …nanced by labor income taxes. The key assumption is that workers discount the future more than capitalists.

Since Reichlin (1986), the Diamond (1965) one-sector overlapping generations model augmented to include endogenous labor supply, external e¤ects and …scal increasing returns has become a popular framework to analyze expectations driven business cycles. 1 Unlike those early works that focus on a particular case without …rst period consumption, recent works such as Cazzavillan and Pintus (2004, 2006), Lloyd-Braga et al. (2007) and Chen and Zhang (2009a, 2009b), consider a life-cycle utility function which is …rst, separable between consumption and leisure, and second, linearly homogenous with respect to young and old consumptions. The main contribution of the …rst two papers is to analyze the relationship between external e¤ects and indeterminacy in the aggregate OLG model. Our paper di¤ers from theirs in at least three aspects. First, we discuss the relationship between …scal policy and indeterminacy in the very same aggregate OLG model. Particularly, we concentrate on the focal case where constant government expenditure is …nanced by labor income taxes and show that local indeterminacy occurs with small labor income tax rates, provided that the elasticity of

 Maine’s maple industry—which counts the licensed producers, and sales at retail food stores and businesses impacted by Maine Maple Sunday—generates an annual direct contribution to the state’s economy of an estimated $27.7 million in output, 567 full- and part-time jobs, and $17.3 million in labor income.

Expected direct impacts of new hotel construction expenditures and expanding tourism expenditures on construction, and hotels and restaurants sectors’ production, labor demand, labor income, net taxes on production, and imports are summarized in Table 1. Note that direct impacts on labor demand, labor income, net taxes, and imports of the construction expenditures and tourism expenditures are calcula- ted by using relevant direct coefficients from I-O tab- le. Since direct impacts are considered at this point, impacts on production are equal to the expected inc- reases in direct expenditures. With a higher increase in expenditures, hotels and restaurants sector creates higher increases in labor demand and net taxes. But construction creates more labor income.

The dataset contains detailed information on the main components of all income sources, income-related deductions of type of income, the rights and effective tax exemp- tion of each deduction, the legal tax bases, disaggregated information on a broad range of tax credits and the overall tax liability. In terms of socio-demographic characteristics, we observe gender, date of birth, province and city of residence. Besides, the information in the tax return data allows us to infer the number of children and dependents that each taxpayer is responsible for. Table 1 in the online appendix reports the share of income due to each income source (left panel) and the share of income received by each category of taxpayer (right panel). About 80 percent of income reported in the Spanish PIT is labor income, 8.9 percent capital income, 8.3 percent business income and 3.9 per- cent capital gains. If we classify taxpayers into different categories based on their most important source of income, we observe that wage employees account for 82 percent of the tax returns analyzed. Self-employed taxpayers represent 7.8 percent of the sample, although it is worth noting that only two-thirds of these (5.2 percent of the total) are under the direct estimation regime. The rest of self-employed taxpayers are in the “ob- jective estimation” or agricultural regimes, where the tax liability is determined based on observable features of each business, rather than actual income. For this reason, in the analyses performed below we will only consider the first group as self-employed. 12 The remaining 10 percent of taxpayers are almost equally split into the “saver” and “investor” categories, where the most relevant income sources are capital income or capital gains, respectively.

Adverse effects on employment of unemployment benefits and social benefits in general have been widely shown in the WS-PS models or in matching models of Pissarides [4]. Many studies (Cheron [5]) have shown in different analytical frameworks for the benefit of replac- ing the current system of unemployment compensation through a system of basic income. However, the results of these studies often have some confusion. Indeed, it is not uncommon that they attribute to basic income prop- erties that are due either to a policy of replacing a given system by a system of basic income, or to its financing system. In this paper, we show that introducing a basic income may have positive effects in terms of poverty reduction (absolute), but is neutral on the labor market equilibrium and we cannot expect a direct effect on un- employment. These results are obtained through a match- ing model with horizontal differentiation agents.

This study tests for labor market hysteresis in low income countries while accounting for structural break in the unemployment rates. This is to verify if unemployment in low income countries will return back to natural rate of unemployment in the long run using data from Nigeria and South Africa. It follows the procedure for single structural break unit root test by Zivot and Andrews (1992). The empirical result indicates that accounting for structural break makes the unemployment rate series stationary for Nigeria; hence, shocks to the unemployment rates will have temporary effects. Contrarily, evidence of hysteresis was found in South Africa’s unemployment rates series because it was not stationary. Nigeria’s macroeconomic policy can aim at lowering inflation through a contractionary policy, it will temporarily increase unemployment but it will return back to its natural state, but structural reforms that will prompt shock on South African unemployment will increase the persistence of hysteresis.