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The Marginal Cost of Public Funds in OECD Countries. Hours of Work Versus Labor Force Participation

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  • Henrik Jacobsen Kleven
  • Claus Thustrup Kreiner
  • Claus Thustrup Kreiner

Abstract

A central finding of the modern labor market literature is that labor supply responses tend to be concentrated along the extensive margin (labor force participation) rather than the intensive margin (hours of work). Yet, the literature on the marginal cost of public funds (MCF) focuses solely on the intensive margin. In this paper we demonstrate that it is important to incorporate extensive labor supply responses into the analysis. Firstly, MCF becomes a function of average taxes, rather than just marginal taxes. Secondly, participation decisions and thus MCF depend on the magnitude of transfers for those out of work. Our calculations for 23 OECD countries reveal that the MCF becomes substantially higher once the participation e.ect is accounted for. This is especially the case for continental European countries where average taxes are high and benefit systems are generous.

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  • Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Claus Thustrup Kreiner, 2003. "The Marginal Cost of Public Funds in OECD Countries. Hours of Work Versus Labor Force Participation," CESifo Working Paper Series 935, CESifo.
    • Handle: RePEc:ces:ceswps:_935
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    19. Albouy, David & Farahani, Arash & Kim, Heejin, 2018. "Productivity and Quality-of-Life Benefits to Rural Infrastructure," Issue Reports 277657, Farm Foundation.
    20. Copenhagen Economics, 2010. "Company Car Taxation," Taxation Papers 22, Directorate General Taxation and Customs Union, European Commission.
    21. Ethan M.J. Lieber & Lee M. Lockwood, 2013. "Costs and Benefits of In-Kind Transfers: The Case of Medicaid Home Care Benefits," Working Papers wp294, University of Michigan, Michigan Retirement Research Center.
    22. Michael Kloß & Oskar Krohmer, 2012. "Zur Ermittlung der Selbstfinanzierungsquote von staatlichen Förderprogrammen," ifo Dresden berichtet, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 19(03), pages 05-11, June.
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