Abstract
AbstractIs a more heterogeneous population beneficial or harmful to long-term economic performance? This article addresses this and other questions in a dynamic general equilibrium model where consumers differ in their labour productivity and time preference. We show how differences in the cross-sectional distribution of these characteristics can affect the economy via two channels. The first one involves changing the composition of the labour force; and the second one involves changing the cross-sectional distribution of the marginal tax rate. We show how these channels are, respectively, determined by the shape of the labour supply function and the curvature of the marginal tax function.
Highlights
Is a more heterogeneous population bene...cial or harmful to long-term economic performance?What role does redistributive policy, such as progressive taxation, plays in this matter? In this paper, we address these questions in a dynamic general equilibrium model where consumers di¤er ex ante in time preference and labour productivity.[1]
Changing either the distribution of labour productivity or time preference will a¤ect the formation of aggregate labour supply
Changing the distribution of time preference will have an e¤ect on the distribution of marginal tax rates across individuals
Summary
Is a more heterogeneous population bene...cial or harmful to long-term economic performance?. Individuals’ choices, including their labour supply decisions, are a¤ected only indirectly through the general equilibrium e¤ect on wage rate and interest rate Within this model, we are able to derive a necessary and su¢cient condition under which an increase in labour productivity heterogeneity will lead to an expansion in aggregate labour supply in the steady state. The heterogeneous economy will have a lower average marginal tax rate than the homogeneous economy.[8] Our main results in Section 4.1 generalise this comparison to any two heterogeneous economies which are otherwise identical except for the distribution of time preference Changing this distribution will a¤ect the formation of aggregate labour supply, as in the case of labour productivity heterogeneity.
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