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The Impact Of Fiscal Policy On Labor Supply And Education In An Economy With Household And Market Production

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  • Alison Booth

    ()

  • Melvyn Coles

Abstract

This paper considers optimal educational investment and labour supply with increasing returns to scale in the earnings function. In so doing we develop the work of Rosen (1983), who first highlighted the increasing returns argument that arises because private returns to human capital investment are increasing in subsequent utilization rates. We demonstrate that increasing returns generates task specialisation - individuals choose to become either home specialists or work specialists. With heterogeneous workers, we show for certain types, that a tax on labour income leads to large, non-marginal substitution effects; i.e. those with a comparative advantage in home production are driven out of the market sector. Tax deadweight losses are consequently large. Consistent with the theory, our empirical results, using a cross-country panel, find that gender differences in labour supply responses to tax policy can play an important role in explaining differences in aggregate labour supply across countries.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2007-08.

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Length: 37 pages
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:een:camaaa:2007-08

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  1. Alison L. Booth & Melvyn Coles, 2006. "A Microfoundation for Increasing Returns in Human Capital Accumulation and the Under-Participation Trap," CEPR Discussion Papers 543, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  2. Paul Gomme & Richard Rogerson & Peter Rupert & Randall Wright, 2005. "The Business Cycle and the Life Cycle," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 415-592 National Bureau of Economic Research, Inc.
  3. Florence Jaumotte, 2003. "Labour Force Participation of Women: Empirical Evidence on The Role of Policy and Other Determinants in OECD Countries," OECD Economic Studies, OECD Publishing, vol. 2003(2), pages 51-108.
  4. Patricia F. Apps & Ray Rees, 1999. "Individual versus Joint Taxation in Models with Household Production," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(2), pages 393-403, April.
  5. Richard Rogerson, 2007. "Taxation and market work: is Scandinavia an outlier?," Economic Theory, Springer, Springer, vol. 32(1), pages 59-85, July.
  6. Conny Olovsson, 2004. "Why do Europeans Work so Little?," 2004 Meeting Papers 760, Society for Economic Dynamics.
  7. Edward C. Prescott, 2004. "Why do Americans Work so Much More than Europeans?," NBER Working Papers 10316, National Bureau of Economic Research, Inc.
  8. Hartog,Joop & Maassen van den Brink,Henriƫtte (ed.), 2007. "Human Capital," Cambridge Books, Cambridge University Press, number 9780521873161, 9.
  9. Rosen, Sherwin, 1983. "Specialization and Human Capital," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 1(1), pages 43-49, January.
  10. Rios-Rull, Jose-Victor, 1993. "Working in the Market, Working at Home, and the Acquisition of Skills: A General-Equilibrium Approach," American Economic Review, American Economic Association, American Economic Association, vol. 83(4), pages 893-907, September.
  11. Acemoglu, Daron, 1996. "A Microfoundation for Social Increasing Returns in Human Capital Accumulation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(3), pages 779-804, August.
  12. Steven J. Davis & Magnus Henrekson, 2004. "Tax Effects on Work Activity, Industry Mix and Shadow Economy Size: Evidence from Rich-Country Comparisons," NBER Working Papers 10509, National Bureau of Economic Research, Inc.
  13. Susumu Imai & Michael P. Keane, 2004. "Intertemporal Labor Supply and Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 601-641, 05.
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Cited by:
  1. Booth, Alison L & Coles, Melvyn G & Gong, Xiaodong, 2007. "Increasing Returns to Education: Theory and Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6266, C.E.P.R. Discussion Papers.

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