Endogenous Labor Supply Research Articles

Social Preferences and Redistribution under Direct Democracy

There is growing evidence on the roles of fairness and social preferences as fundamental human motives, in general, as well as in voting contexts. In contrast, models of political economy are based on sel…sh-voters who derive utility solely from ‘own’payo¤. We examine the implications of introducing voters with social preferences, as in Fehr and Schmidt (1999), in a simple general equilibrium model with endogenous labour supply. We demonstrate the existence of a Condorcet winner for voters, with heterogeneous social preferences (including purely sel…sh preferences), using the single crossing property of voters’preferences. Relatively small changes in the preference of voters can have relatively large redistributive consequences. We implications for the size of the welfare state; regional integration; and issues of culture, identity and immigration.

Fiscal Sustainability and Structural Reforms – Incorporating Labour Supply Responses in Long-Term Modelling

In general the issue of long-term sustainability of public finances is assessed given current policy and behavior. Future demographic pressure on public expenditure must then be met by either pre-funding, reductions in public welfare systems or tax increases. In this paper we explore a third strategy. By incorporating endogenous labor supply responses into the modelling framework, structural reforms (i.e. tax cuts) may be simulated in a more realistic way than in a purely static framework. In this way demographic pressure can be dealt with through structural reforms as well as through consolidation strategies. Our simulations suggest that, at least in the Swedish case, strategic tax cuts might serve as an important path to improved fiscal sustainability. This leads us to the conclusion that policies aimed at providing incentives should also be taken into consideration when analyzing the long-term sustainability of public finances.

Insurance and opportunities: A welfare analysis of labor market risk

Using a model with constant relative risk-aversion preferences, endogenous labor supply and partial insurance against idiosyncratic wage risk, this paper provides an analytical characterization of three welfare effects: (a) the welfare effect of a rise in wage dispersion, (b) the welfare gain from completing markets, and (c) the welfare effect from eliminating risk. The analysis reveals an important trade-off for these welfare calculations. On the one hand, higher wage uncertainty increases the cost associated with missing insurance markets. On the other hand, greater wage dispersion presents opportunities to raise aggregate productivity by concentrating market work among more productive workers. Welfare effects can be expressed in terms of the underlying parameters defining preferences and wage risk or, alternatively, in terms of changes in observable second moments of the joint distribution over individual wages, consumption and hours.

The quest for status and endogenous labor supply: the relative wealth framework

We analyze the implications of relative wealth preferences in a Ramsey model with endogenous labor supply. In contrast to relative consumption preferences, they allow for the possibility that agents work too little in the long run, while under both specifications the steady-state levels of consumption and the stock of physical capital exceed their socially optimal counterparts. Even in the case of excessive leisure agents are worse off in terms of intertemporal utility because initial transitional dynamics are characterized by under-consumption and excessive work effort. “Too much” long-run consumption of goods and leisure is possible due to the excessive capital-labor ratio.

Are family allowances and fertility-related pensions perfect substitutes?

This paper discusses alternative ways to deal with the positive externalities of having children in a pay-as-you-go pension system. Family allowances are compared to introducing a fertility-related component into the pension formula. In an endogenous labor supply setting, both instruments are shown to be equivalent if general pensions are related to previous contributions. In contrast, if general pensions are of the flat-rate type, making pensions contingent on the number of children is generally preferable to family allowances because the latter creates a larger tax load on labor supply.

Intergenerational Allocation of Government Expenditure, Externalities and Optimal Taxation

In this paper we argue that government's allocation of resources among competing age groups has significant bearing on labor and capital supply and optimal tax policies. Empirics reveal that allocation of public expenditure is highly favorable to the old cohorts in developed countries. However, we don't know whether this allocation is socially optimal. In this study, we develop a suitable framework of two period lived OLG with endogenous labor supply in both periods to derive the socially optimal level of public expenditure on the young and the old for two cases: i) public spending is only utility enhancing and ii) public spending is both utility and labor productivity enhancing. This study underscores the importance of the allocation of public expenditure between different age groups and sheds light on the factors that determine socially optimal public allocation between the young and the old. We also examine how labor, capital and optimal tax rates change when spending on the young and the old deviates from the socially optimal level. The results on optimal taxes also highlight the implications of life cycle economy. Tax deductions, exemptions etc., that make labor income tax different across age cohorts, are optimal if consumption tax is not uniform across cohorts. These cohort specific consumption taxes also create distortion in the intertemporal margin, resulting in non-zero capital income tax in the long run.

Is Prescott Right? Welfare State Policies and the Incentives to Work, Learn and Retire

This paper bolsters Prescott's (2004) claim that high taxes are responsible for lacklustre labor market performance in continental European countries. We develop a lifecycle model with endogenous skill formation, endogenous labor supply, and endogenous retirement. Labor taxation distorts not only labor supply, but also education and retirement decisions. Actuarially unfair pensions further exacerbate labor tax distortions on retirement. Education subsidies can nevertheless cushion the adverse impact of taxation on skill formation. Feedbacks between education, labor supply, and retirement are important. The model is simulated with realistic behavioral elasticities that are consistent with microeconometric evidence. If, besides labor supply, also learning and retirement are endogenous, the uncompensated (compensated) elasticity of the tax base equals 0.46 (0.85), which is more than twice as large as the standard uncompensated (compensated) labor supply elasticity of 0.18 (0.40). Furthermore, life-cycle interactions between education, working and retirement are quantitatively important and the interactions raise all behavioral elasticities substantially. For example, the uncompensated labor supply elasticity increases with one-half due to life-cycle interactions (to 0.26). We demonstrate that low European labor supply can be fully explained by taxation without relying on unrealistically high labor supply elasticities. Reducing labor market distortions, cutting benefit levels, lowering tax rates, and making (early) retirement actuarially fairer, therefore boosts labor supply, delays retirement, and stimulates skill formation. In addition, high education subsidies are needed in large welfare states to off-set explicit and implicit tax burdens on human capital investment.

Intergenerational Risk Sharing, Pensions and Endogenous Labor Supply in General Equilibrium

In the context of a two-tier pension system, with a pay-as-you-go first tier and a fully funded second tier, we demonstrate that a system with a defined wage-indexed second tier performs strictly better than one with a defined contribution or defined real benefit second tier. The former completely separates systematic redistribution (confined to the first tier) from intergenerational risk sharing (the role of the second tier). This way labor supply is undistorted.

Reducing the Excess Burden of Subsidizing the Stork: Joint Taxation, Individual Taxation, and Family Tax Splitting

Analyzing a homogenous household setting with endogenous fertility and endogenous labor supply, we demonstrate that moving from joint taxation to individual taxation and adapting child benefits so as to keep fertility constant entails a Pareto improvement. The change is associated with an increase in labor supply and consumption and a reduction of the marginal income tax, while the child benefit may move in either direction. Similarly, a move from joint taxation to some scheme of family tax splitting increases labor supply and welfare.

Trade Openness and Gender in Uruguay: A CGE Analysis

In this paper we analyze the gender differentiated impacts of trade openness in Uruguay using a gender aware CGE model with endogenous labor supply and a home production function. We simulate complete trade liberalization and an increase in tariffs to the level of 1994. Trade liberalization increases female employment and wages, reducing the gender wage gap. These findings are consistent with Cagatay (2001) and Fofana et al (2003). The effect of trade openness on time distribution of workers is different by skills. Skilled workers, mainly women, reduce time spent in leisure and domestic work increasing labor supply. In contrast, unskilled workers increase leisure time, especially men. Trade openness leads to a more equitable distribution of time spent in domestic work. When there is a more imperfect substitution among genders in the home production function, women reduce more leisure time. The increase in tariff to the level of 1994 has the opposite results.

When leisure becomes excessive: a bifurcation result in endogenous growth theory

The traditional assumption concerning endogenous labor supply in models of economic growth is that utility increases with leisure, independently of the specific time allocation of the representative agent observed at a given moment. In this note, we explore the consequences, over dynamic stability, of assuming that the agent dislikes having free time in excess, i.e., of considering that the marginal utility of leisure is not necessarily positive for every value of the leisure share (in particular, for high values of this share). By including this assumption in a typical AK endogenous growth model, we find that the system will rest, independently of parameter values, on a bifurcation line.

Can consumption spillovers be a source of equilibrium indeterminacy?

In the framework of a one-sector exogenous growth model we show that consumption externalities are not a source of equilibrium indeterminacy when the labor supply is inelastic, whereas they are under endogenous labor supply. In particular, when the marginal rate of substitution between own consumption and the others' consumption is constant along the equilibrium path, the equilibrium may exhibit indeterminacy when the following two conditions are simultaneously satisfied: (i) both consumption and production externalities are present and (ii) the elasticity of the labor demand is larger than the elasticity of the Frisch labor supply. In contrast, when the marginal rate of substitution is not constant, the equilibrium may exhibit indeterminacy even if the previous two conditions are not met. In this case, the equilibrium can exhibit indeterminacy even if production externalities are absent. We also show that these results do not apply to an endogenous growth model, where indeterminacy may arise only when condition (ii) is met.

TECHNOLOGY, PREFERENCE STRUCTURE, AND THE GROWTH EFFECT OF MONEY SUPPLY

This paper studies the growth effect of money supply in the presence of increasing returns and endogenous labor supply. By using a simple model of endogenous growth with a cash-in-advance constraint, it is shown that the growth effect of money supply depends on the specifications of preference structures as well as of the production technology. Either if the production technology exhibits strong nonconvexity or if the utility function has a high elasticity of intertemporal substitution, then there may exist dual balanced-growth equilibria and the impact of a change in money growth depends on which steady state is realized in the long run. It is also shown that there is no systematic relationship between the growth effect of money supply and local determinacy of the balanced growth path.

Optimal Taxation of Capital Income in Models with Endogenous Fertility

This paper studies the issue of the efficient taxation of capital income in intertemporal optimizing models with infinite horizons and endogenous population growth. We discover that, in the steady state, the optimal capital income tax is negative when the economy is closed. Instead, in a small open economy facing perfect capital mobility, the Chamley-Judd result of a zero tax rate is obtained if capital taxation is source-based; otherwise, income from wealth should be subsidized if taxation is residence-based. Moreover, we find that in our setup, taxing capital income with immediate expensing of capital expenditure may replicate the first-best equilibrium when labor is subsidized. Our findings, which depart substantially from those obtained in representative agent models with an endogenous labor supply, are to be ascribed to a wealth effect in the fertility choices that directly affects the pseudo-welfare function of the social planner.

Animal spirits in cash-in-advance economies

Résumé La pertinence empirique des modèles avec indétermination de l’équilibre et fluctuations “à taches solaires” a souvent été remise en cause, notamment parce que de tels modèles exigeraient des rendements d’échelle fortement croissants ou des calibrations relativement controversées des fondamentaux de l’économie. Dans cet article, nous étudions l’apparition de tels phénomènes dans un modèle standard de croissance optimale avec offre de travail endogène lorsqu’une contrainte d’encaisses préalables partielle porte sur les dépenses de consommation des ménages. Nous montrons, sous des préférences usuelles et des rendements d’échelle constants, que de tels phénomènes émergent en présence d’une contrainte de liquidité arbitrairement faible . Nous étudions également les propriétés cycliques de cette économie en présence de chocs portant simultanément sur la technologie et les croyances, et analysons nos résultats au regard de modèles comparables proposés dans la littérature. Classification JEL : D90, E32, E41.

Leisure, amenity, and capital accumulation in a multi-region model

This paper proposes a multi-region growth model with endogenous labor supply, endogenous amenity, and capital accumulation. Although the production side is the same as in the neoclassical growth theory, in order to solve issues related to regional migration with capital accumulation we propose an alternative approach to consumer decisions about time distribution between work and leisure, housing consumption and saving. We show that the dynamics of the J-region national economy can be described by J-dimensional differential equations. We simulate the long-term economic structure of the national economy with three regions. It is demonstrated that with the Cobb–Douglas production functions and specified values of the parameters, the national dynamics has a unique equilibrium. We also carry out comparative statics analysis with regard to productivity levels, amenity parameters, propensity to save, and the population.

Animal spirits in cash-in-advance economies

Resume La pertinence empirique des modeles avec indetermination de l’equilibre et fluctuations “a taches solaires” a souvent ete remise en cause, notamment parce que de tels modeles exigeraient des rendements d’echelle fortement croissants ou des calibrations relativement controversees des fondamentaux de l’economie. Dans cet article, nous etudions l’apparition de tels phenomenes dans un modele standard de croissance optimale avec offre de travail endogene lorsqu’une contrainte d’encaisses prealables partielle porte sur les depenses de consommation des menages. Nous montrons, sous des preferences usuelles et des rendements d’echelle constants, que de tels phenomenes emergent en presence d’une contrainte de liquidite arbitrairement faible. Nous etudions egalement les proprietes cycliques de cette economie en presence de chocs portant simultanement sur la technologie et les croyances, et analysons nos resultats au regard de modeles comparables proposes dans la litterature.Classification JEL : D90, E32, E41.

Exchange-rate-based stabilization: Imperfect competition and supply-side effects

This paper studies exchange-rate-based stabilization programs in the context of a dynamic general equilibrium model for a small open economy that incorporates imperfect competition, a backward-looking wage setting, and an endogenous labor supply. In contrast to previous results, the analysis shows that a permanent disinflation leads to a sustained expansion in the domestic sector and a slow inflation convergence. This study also shows that a temporary stabilization replicates a “boom-recession cycle”. These results suggest that a backward-looking wage setting and an endogenous labor supply are the key ingredients for reproducing the stylized facts of exchange-rate-based stabilization.

On the role of public debt in an OLG model with endogenous labor supply

This paper argues that some propositions reported in a recent paper by [Fanti., L., Spataro, L., 2006. Endogenous labor supply in Diamond’s (1965) OLG model: A reconsideration of the debt role. Journal of Macroeconomics 28, 28–438] are not warranted. They claim that including an endogenous labor supply in an overlapping generations model may change the conclusions concerning the capital accumulation and welfare effects of (internal) public debt issue. We show that their results are not the consequence of the Cobb–Douglas preferences they posit, but of a rather incomplete development of their model. When this incompleteness is corrected, and under general assumptions on preferences and technology, the propositions arrived at originally by [Diamond, P.A., 1965. National debt in a neoclassical growth model. American Economic Review 55, 1126–1150] in a model that does not take the labor–leisure decision into account continue to hold. In particular, no matter whether the starting point is a dynamically efficient or inefficient steady state, an increase in the stock of public debt per taxpayer unambiguously depresses the capital–labor ratio and raises the interest rate. Moreover, the welfare level will increase (decrease) when the starting point is a dynamically inefficient (efficient) steady state.

Can environmental taxation stimulate growth? The role of indeterminacy in endogenous growth models with environmental externalities

This paper examines the effects of environmental taxation on long-run growth in an infinitely lived representative agent model of endogenous growth with negative pollution externalities. The novelty of this paper lies in its investigation of how the long-run effects of environmental taxes are affected by the possible emergence of indeterminacy of equilibria in Romer's [1986. Increasing returns and long-run growth. Journal of Political Economy 94, 1002–1037] learning-by-doing model with endogenous labor supply. The analysis shows that environmental taxation generally enhances (harms) long-run growth when the balanced growth path is indeterminate (determinate).