Trends and Fluctuations in the Household's Marginal Rate of Substitution Condition: Time Series Evidence from the OECD
AbstractThere is a large literature, including work by Hall (1997), Chari, Kehoe, and McGrattan (2002), Gali, Gertler, and Lopez-Salido (2002), and many others that has studied the gap between the household's static marginal rate of substitution condition (MRS) between consumption and leisure and the real wage using postwar U.S. data. However, there is very little international evidence on deviations in this condition. This paper presents a comprehensive international analysis by documenting deviations in this condition using annual and quarterly data from 19 OECD countries over the last 40 years. We use standard balanced growth preferences in the analysis and find that there are very large and non-stationary deviations in this condition over time in almost all the countries. In particular, the gap between the marginal rate of substitution and the real wage grows as much as 60 percent over this period. We also find very similar patterns in this gap across some regions. There is a large gap in most European countries indicating that households either experienced a large decrease in the incentive to work, or a large increase in the marginal disutility of working. We next use Mendoza and Tesar's time series data on tax rates to see how much tax rate changes can account for these MRS gaps. We find that changes in taxes account on average for about half of this gap. However, for half of the countries that we study, the residual MRS gap remains large and non-stationary. This suggests that either the tax rates households face differ significantly from the Mendoza-Tesar rates, or that there are other quantitatively important factors driving a wedge between the MRS and the after-tax real wage rate
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 469.
Date of creation: 2004
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
marginal rate of substituion between consumption and leisure; distortions to labor supply;
Find related papers by JEL classification:
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.