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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

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, 2003. "The Marginal Cost of Public Funds in OECD Countries. Hours of Work Versus Labor Force Participation," CESifo Working Paper Series 935, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_935
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    6. Schaefer, Thilo & Peichl, Andreas & Fuest, Clemens, 2007. "Is a Flat Tax politically feasible in a grown-up Welfare State?," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 07-6, University of Cologne, FiFo Institute for Public Economics.
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