Endogenous Labor Supply Research Articles

On equilibrium in monopolistic competition with endogenous labor

We consider a model of monopolistic competition with several heterogeneous sectors and endogenous labor supply. For low (high) values of the labor supply elasticity, we show that there is always a unique equilibrium. For medium values of the labor supply elasticity, there are either zero or two equilibria.

Consumption Insurance against Wage Risk: Family Labor Supply and Optimal Progressive Income Taxation

We show that a calibrated life cycle two-earner household model with endogenous labor supply can rationalize the extent of consumption insurance against shocks to male and female wages, as estimated empirically by Blundell, Pistaferri, and Saporta-Eksten (2016) in US data. In the model, 35 percent of male and 18 percent of female permanent wage shocks pass through to consumption, compared to the empirical estimates of 32 percent and 19 percent. Most of the consumption insurance against permanent male wage shocks is provided through the presence and labor supply response of the female earner. Abstracting from this private intrahousehold income insurance mechanism strongly biases upward the welfare losses from idiosyncratic wage risk as well as the desired extent of public insurance through progressive income taxation. Relative to the standard one-earner life cycle model, the optimal degree of tax progressivity is significantly lower and the welfare gains from implementing the optimal system are cut roughly in half. (JEL D15, H21, H24, J16, J22, J31)

Reforming the Individual Income Tax in Spain

Can the Spanish government generate more tax revenue by making personal income taxes more progressive? To answer this question, we build a life-cycle economy with uninsurable labor productivity risk and endogenous labor supply. Individuals face progressive taxes on labor and capital incomes and proportional taxes that capture social security, corporate income, and consumption taxes. Our answer is yes, but not much. A reform that increases labor income taxes for individuals who earn more than the mean labor income and reduces taxes for those who earn less than the mean labor income generates a small additional revenue. The revenue from labor income taxes is maximized at an effective marginal tax rate of 51.6% (38.9%) for the richest 1% (5%) of individuals, versus 46.3% (34.7%) in the benchmark economy. The increase in revenue from labor income taxes is only 0.82%, while the total tax revenue declines by 1.55%. The higher progressivity is associated with lower aggregate labor supply and capital. As a result, the government collects higher taxes from a smaller economy. The total tax revenue is higher if marginal taxes are raised only for the top earners.The increase, however, must be substantial and cover a large segment of top earners. The rise in tax collection from a 3 percentage points increase on the top 1% is just 0.09%. A 10 percentage points increase on the top 10% of earners (those who earn more than €41,699) raises total tax revenue by 2.81%.

Optimal Income Taxation With Tax Avoidance and Endogenous Labor Supply

We determine the optimal income tax schedule when individuals both choose endogenously their labor supply and have the possibility of avoiding paying taxes. Considering a convex concealment cost function, we propose a formula for the optimal marginal tax rate, that generalizes the standard Mirrlees formula to the case of tax avoidance. We also show that the results obtained by Casamatta (2020) in the fixed income case hold true when labor supply is endogenous: with a low enough marginal cost of avoidance, it is optimal to let some taxpayers, located in the interior of the skill distribution, avoid taxes.

Is Funding a Large Universal Basic Income Feasible? A Quantitative Analysis of UBI with Endogenous Labour Supply

This article addresses a key point of contention in the ongoing UBI debate: given the way labour supply responds to tax changes, is it possible to fund a large UBI using income taxes? Using recent empirical estimates and quantitative tools from the public economics literature, we assess what level of UBI may be funded given the fall in labour supply that could be induced by the required larger taxes. Despite a prevalent belief that a large UBI would be fiscally irresponsible, we find that it is possible to fund a large annual UBI over £11,000 per person, that it could be funded through a 45% flat tax, but that increasing taxes on the most affluent alone would be insufficient. Our findings highlight an important tension: a large UBI is possible, but it requires large tax rates, including for those at the bottom of the income distribution.

Reforming the individual income tax in Spain

Can the Spanish government generate more tax revenue by making personal income taxes more progressive? To answer this question, we build a life-cycle economy with uninsurable labor productivity risk and endogenous labor supply. Individuals face progressive taxes on labor and capital incomes and proportional taxes that capture social security, corporate income, and consumption taxes. Our answer is yes, but not much. A reform that increases labor income taxes for individuals who earn more than the mean labor income and reduces taxes for those who earn less than the mean labor income generates a small additional revenue. The revenue from labor income taxes is maximized at an effective marginal tax rate of 51.6% (38.9%) for the richest 1% (5%) of individuals, versus 46.3% (34.7%) in the benchmark economy. The increase in revenue from labor income taxes is only 0.82%, while the total tax revenue declines by 1.55%. The higher progressivity is associated with lower aggregate labor supply and capital. As a result, the government collects higher taxes from a smaller economy. The total tax revenue is higher if marginal taxes are raised only for the top earners. The increase, however, must be substantial and cover a large segment of top earners. The rise in tax collection from a 3 percentage points increase on the top 1% is just 0.09%. A 10 percentage points increase on the top 10% of earners (those who earn more than €41,699) raises total tax revenue by 2.81%.

Kaleckian conflict inflation with endogenous labor supply

AbstractWe propose a simple but well‐defined Kaleckian model of conflict inflation, consisting of a Kaleckian investment function and conflict inflation, resulting from workers and capitalists making conflicting claims over their shares in output. The bargaining power of workers depends on the rate of employment. The central bank engages in inflation targeting through changes in the interest rate. We establish the existence of an economically meaningful steady state and examine its stability properties both analytically and numerically. We show the possibilities of cyclical trajectories under certain conditions.

Asset bubble and endogenous labor supply: A clarification

This paper analyzes the link between asset bubbles, endogenous labor and capital. First, we explicitly and theoretically derive the conditions to have a crowding-in effect of the bubble, i.e. higher levels of capital and labor. Second, the utility function we consider shows that this result does not require an arbitrarily high elasticity of intertemporal substitution in consumption.

Corruption and Public Service in an Extended Solowian Growth Model with Endogenous Labor Supply

This study examines the impact of bureaucratic corruption on economic growth of a small open economy. The economy is composed of two types of households (the workers and the officials) and two sectors (the industrial sector and public sector). Corruption may occur in different parts of the economy. We built a model for analyzing the role of corruption on economic growth, income and wealth distribution between the officials and workers. The model takes account of corruption in the capital market, the labor market, and production sector. It describes dynamic interactions of growth, corruption with endogenous tax rate and different exogenous corruption rates. We simulate motion of the dynamic system and demonstrate how an increase of corruption in the production sector, in the labor market, and other parameters affect the transitory process and long-run state of economic growth.

A non-scale-directed technical change model with endogenous labor share

ABSTRACT We extend a directed technical change (DTC) model without scale effects that allows labour share to vary over time. By decomposing the labour share by sectors, skilled and unskilled, and, in line with the empirical evidence, by considering a lower value in the skilled sector, we show that: (i) both the technological-knowledge bias per worker, the skill premium and the relative importance of the skilled sector continue to increase over time until the steady state, as in the baseline model; (ii) the labour share falls over time due to a combination of an increased importance and a lower labour share in the skilled sector; (iii) by considering endogenous labour supply, a relative increase in skilled labour also decreases the labour share during the transitional dynamics.

Ageing, human capital and demographic dividends with endogenous growth, labour supply and foreign capital

We add endogenous labour supply to exogenous population growth in an Uzawa-Lucas endogenous growth model with international capital movements. Under non-linearity from a decreasing marginal product of labour in education and a positive human capital externality in output production, a combination of an estimated debt-interest relation and a realistic calibration of the model shows the following. (i) The demographic dividends from a fall in the population growth rate increase welfare in the short run and reduce it in the long run. (ii) A higher (lower) growth rate of the dependency ratio leads to a higher (lower) optimal level of education and technical change. (iii) Lower past cumulated savings lead to a higher foreign-debt/GDP ratio, higher interest rates, more education time and technical change, and more consumption in the future rather than the present. (iv) A higher depreciation rate of human capital through ageing has a stronger impact on growth rates than all other variables that could be associated with ageing and a good mitigating policy is to spend more time on education.

Endogenous hours and the wealth of entrepreneurs

US entrepreneurs typically work long hours in their firms and these hours form a large part of the firms' labor input. This paper studies the role of endogenous owner hours in shaping the wealth distribution among entrepreneurs. We introduce owners' endogenous labor supply into a model of entrepreneurial choice and financial frictions. The model fits well the levels and the dispersion of wealth among entrepreneurs. Long owner hours incentivize poor, highly productive individuals to be owners and help the most productive owners to accumulate large quantities of wealth. On net, owners working long hours decreases the median owner wealth and increase wealth dispersion among owners. Differently, the ability to work sufficiently short hours incentivizes owners to run low productivity firms with high wealth to income ratios. Finally, alternative calibrations ignoring the endogenous labor supply of owners lead to owners that are much richer than in the data and overstate the effect of financial frictions in the economy.

Spousal Insurance, Outside Options and Wage Bargaining

Spousal insurance raises a worker's outside option, allowing workers to bargain a higher wage. To study this mechanism I propose a random search model with ex-ante heterogeneity in ability, endogenous marriage, endogenous labor supply of spouses and wages determined by Nash Bargaining. Using the model, I derive an empirical specification to test the mechanism and the sources of endogeneity to be addressed. I use a combination of an instrument derived from theory and one instrument based on policy variation to confirm the predictions of the model. A 1 percentage point increase in the share of married women working increases the wage of married individuals by 2.51-3.51%.

EXISTENCE OF STATIONARY EQUILIBRIUM IN AN INCOMPLETE‐MARKET MODEL WITH ENDOGENOUS LABOR SUPPLY

AbstractIn this article, I first study an income fluctuation problem with endogenous labor supply. Let β be the agent's time discount factor and be the constant gross rate of return on assets. For , I show that the agent's wealth either approaches infinity almost surely or converges to a finite level almost surely. For , I prove the existence, uniqueness, and stability of the stationary distribution of state variables. I then show the existence of the stationary general equilibrium in an incomplete‐market model with endogenous labor supply.

Policies Against Tax Evasion Through Ocupational Choice

This paper presents a model of tax evasion with endogenous labor supply in which underreporting in one sector is possible but impossible in another. In addition, there is an unregistered sector where no one reports their earnings to the tax office. We found that the effects on the number of evaders and tax ghosts become more robust and conclusive than those on hours of unreported work usually considered by the literature. Moreover, our results are supported by abundant econometric studies, thereby eliminating current discrepancies between the theoretical framework in the tradition of Allingham and Sandmo (1972) and empirical evidence. Surprisingly, most of the measures that are effective against tax evasion in the registered sectors expand the unregistered sector. To solve this we propose both coercive measures to be applied mainly in the unregistered sector and policies aimed at improving moral attitudes against evasion and productivity rates in the aboveground economy.

Stabilization policy and indeterminacy in a small open economy

This paper studies the (de)stabilizing effects of income tax rules in a two-sector small open economy with production externalities. The paper shows that in the model with positive sector-specific externalities in the investment sector and negative sector-specific externalities in the consumption sector (or positive aggregate investment externalities), a regressive income tax rule can stabilize such an economy against indeterminacy, whereas a progressive income tax rule can increase the tendency for indeterminacy to occur. This paper also studies two variants that consider an imperfect world bond market and an endogenous labor supply, respectively, and shows that the qualitative results stated above remain valid. Moreover, increasing the level of sector-specific investment externalities can decrease (increase) the minimal level of tax progressivity required for indeterminacy if the investment externalities are below (above) a certain critical value and if the negative externalities in the consumption sector are taken as given.

On Equilibrium in Monopolistic Competition with Endogenous Labor

We consider a model of monopolistic competition with several heterogeneous sectors and endogenous labor supply. For low (high) values of the labor supply elasticity, we show that there is always a unique equilibrium. For medium values of the labor supply elasticity, the set of equilibria (if non-empty) can comprise of several equilibria, with the number of equilibria bounded by the number of sectors.

Social Capital, Endogenous Labor Supply, and Economic Development

Social capital has been increasingly recognized as an important determinant of economic growth in the literature of economic growth. Nevertheless, there are only a few rigorous dynamic growth models which explicitly deal with dynamic interdependence between social capital, physical capital, and economic structure. The purpose of this study is to incorporate social capital in a neoclassical economic growth theory. We propose a dynamic model with interdependence between economic structural change, wealth accumulation, and social capital accumulation. Social capital positively affects total factor productivities and is accumulated through investment, leisure activities, and production. We simulate the model. The study focuses on effects of changes in some parameters on the equilibrium and transitional processes of the economic dynamics. We get some insights through including social capital in economic growth modelling. For instance, if society has lower trust (possibly if we interpret social capital as guanxi in Chinese societies) which results in a rise in depreciation rate of social capital, the economy suffers from falling social capital, productivities, national capital, and national output; consumers have lower income, wealth, and consumption; they also have to spend more time on investing in social capital.

Epstein–Zin Utility, Asset Prices, and the Business Cycle Revisited

Abstract This paper discusses the advantages of Epstein and Zin (1989) (EZ) preferences when building dynamic stochastic general equilibrium (DSGE) models that are consistent with well-known stylized facts of both the business cycle and asset markets. To this end, we combine EZ preferences with several building blocks from the DSGE literature that has tried to solve the equity premium puzzle and to replicate characteristic statistics of the labor market. Our goal is to guide researchers in this area to useful modeling devices and to discuss EZ preferences vis-a-vis the standard time-additive expected utility function. EZ preferences separate the attitude toward risk from the attitude toward intertemporal substitution. We demonstrate that this additional degree of freedom allows us to closely match the empirical facts already in a frictionless production economy with endogenous labor supply. Our study follows Heer and Maußner (2013). We examine models that consider adjustment costs of capital accumulation, consumption habits, and frictions in the allocation of labor. Our empirical targets are estimated from German data.

Endogenous labour supply, endogenous lifetime and economic development

This article develops a theory to explain economic development in a neoclassical growth model. The (co)existence of endogenous labour supply and endogenous lifetime (affected by public and private expenditures on health) allows to effectively observe multiple development scenarios under the assumption of gross substitutability between consumption and leisure. The initial condition of a macro-economy (history) and expectation-driven coordination failures (indeterminacy) become alternative explanations of long-term demo-economic outcomes of nations. The novelty of this study is to link the theoretical literature on endogenous lifetime and economic growth with the theoretical literature on endogenous labour supply and indeterminacy by concentrating on the global analysis. The model also allows to explain the coexistence of least-developed, developing and developed countries in the same setting.