Do Taxes Explain European Employment? Indivisible Labour, Human Capital, Lotteries and Savings
Adding generous government supplied benefits to Prescott's (2002) model with employment lotteries and private consumption insurance causes employment to implode and prevents the model from matching outcomes observed in Europe. To understand the role of a 'not-so-well-known aggregation theory' that Prescott uses to rationalize the high labour supply elasticity that underlies his finding that higher taxes on labour have depressed Europe relative to the US, this paper compares aggregate outcomes for economies with two arrangements for coping with indivisible labour: (1) employment lotteries plus complete consumption insurance, and (2) individual consumption smoothing via borrowing and lending at a risk-free interest rate. The two arrangements support equivalent outcomes when human capital is not present; when it is present, allocations differ because households' reliance on personal savings in the incomplete markets model constrains the 'career choices' that are implicit in their human capital acquisition plans relative to those that can be supported by lotteries and consumption insurance in the complete markets model. Nevertheless, the responses of aggregate outcomes to changes in tax rates are quantitatively similar across the two market structures. Thus, under both aggregation theories, the high disutility that Prescott assigns to labour is an impediment to explaining European non-employment and benefits levels. Moreover, while the identities of the non-employed under Prescott's tax hypothesis differ between the two aggregation theories, they all seem counterfactual.
|Date of creation:||Mar 2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ananth Seshadri & Rodolfo Manuelli, 2005. "Human Capital and the Wealth of Nations," 2005 Meeting Papers 56, Society for Economic Dynamics.
- 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, vol. 45(2), pages 601-641, 05.
- Paul Gomme & Richard Rogerson & Peter Rupert & Randall Wright, 2004.
"The business cycle and the life cycle,"
0404, Federal Reserve Bank of Cleveland.
- Yongsung Chang & Sun-Bin Kim, 2003.
"From Individual to Aggregate Labor Supply: A Quantitative Analysis Based on a Heterogeneous Agent Macroeconomy,"
- Yongsung Chang & Sun-Bin Kim, 2006. "From Individual To Aggregate Labor Supply: A Quantitative Analysis Based On A Heterogeneous Agent Macroeconomy ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 1-27, 02.
- Yongsung Chang & Sun-Bin Kim, 2003. "From individual to aggregate labor supply : a quantitative analysis based on a heterogeneous agent macroeconomy," Working Paper 03-05, Federal Reserve Bank of Richmond.
- Chiappori, P.A., 1989.
"Collective Labour Supply and Welfare,"
DELTA Working Papers
89-07, DELTA (Ecole normale supérieure).
- Jones, Larry E., 2008. "A Note On The Joint Occurrence Of Insurance And Gambling," Macroeconomic Dynamics, Cambridge University Press, vol. 12(01), pages 97-111, February.
- Ed Nosal & Peter Rupert, 2003.
"How amenities affect job and wage choices over the life cycle,"
0302, Federal Reserve Bank of Cleveland.
- Ed Nosal & Peter Rupert, 2007. "How Amenities Affect Job and Wage Choices Over the Life Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(3), pages 424-443, July.
- Burda, Michael C. & Mertens, Antje, 1999.
"Estimating wage losses of displaced workers in Germany,"
SFB 373 Discussion Papers
1999,35, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Burda, Michael C. & Mertens, Antje, 2001. "Estimating wage losses of displaced workers in Germany," Labour Economics, Elsevier, vol. 8(1), pages 15-41, January.
- Hansen, Gary D., 1985.
"Indivisible labor and the business cycle,"
Journal of Monetary Economics,
Elsevier, vol. 16(3), pages 309-327, November.
- Richard Rogerson, 2010.
"Indivisible Labor, Lotteries and Equilibrium,"
Levine's Working Paper Archive
250, David K. Levine.
- Edward C. Prescott & Richard Rogerson & Johanna Wallenius, 2009.
"Lifetime Aggregate Labor Supply with Endogenous Workweek Length,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 23-36, January.
- Edward C. Prescott & Richard Rogerson & Johanna Wallenius, 2007. "Lifetime aggregate labor supply with endogenous workweek length," Staff Report 400, Federal Reserve Bank of Minneapolis.
- James Heckman & Pedro Carneiro, 2003.
"Human Capital Policy,"
NBER Working Papers
9495, National Bureau of Economic Research, Inc.
- John Rust & Christopher Phelan, 1997.
"How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets,"
Econometric Society, vol. 65(4), pages 781-832, July.
- John Rust & Christopher Phelan, 1994. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Public Economics 9406005, EconWPA, revised 06 Jul 1994.
- Rust, J., 1994. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Working papers 9430, Wisconsin Madison - Social Systems.
- Hansen, G.D. & Imrohoroglu, A., 1990.
"The Role Of Unemployment Insurance In An Economy With Liquidity Constraints And Moral Hazard,"
21, California Los Angeles - Applied Econometrics.
- Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-42, February.
- Gary D. Hansen & Ayse Imrohoroglu, 1990. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," UCLA Economics Working Papers 583, UCLA Department of Economics.
- Shaw, Kathryn L, 1989. "Life-Cycle Labor Supply with Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(2), pages 431-56, May.
- Casey B. Mulligan, 2001.
"Aggregate Implications of Indivisible Labor,"
NBER Working Papers
8159, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:6196. See general 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: ()
If references are entirely missing, you can add them using this form.