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The Impact of Fiscal Policy on Labour Supply and Education in an Economy with Household and Market Production

  • Booth, Alison L
  • Coles, Melvyn G

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 labor supply across countries.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6265.

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Date of creation: Apr 2007
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Handle: RePEc:cpr:ceprdp:6265
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  1. Acemoglu, Daron, 1996. "A Microfoundation for Social Increasing Returns in Human Capital Accumulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 779-804, August.
  2. Davis, Steven J. & Henrekson, Magnus, 2004. "Tax Effects on Work Activity, Industry Mix and Shadow Economy Size: Evidence from Rich-Country Comparisons," Ratio Working Papers 57, The Ratio Institute.
  3. Edward C. Prescott, 2004. "Why do Americans Work so Much More than Europeans?," NBER Working Papers 10316, National Bureau of Economic Research, Inc.
  4. 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.
  5. Richard Rogerson, 2007. "Taxation and Market Work: Is Scandinavia an Outlier?," NBER Working Papers 12890, National Bureau of Economic Research, Inc.
  6. repec:cup:cbooks:9780521873161 is not listed on IDEAS
  7. Conny Olovsson, 2009. "Why Do Europeans Work So Little?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 39-61, 02.
  8. 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.
  9. 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.
  10. Rosen, Sherwin, 1983. "Specialization and Human Capital," Journal of Labor Economics, University of Chicago Press, vol. 1(1), pages 43-49, January.
  11. Paul Gomme & Richard Rogerson & Peter Rupert & Randall Wright, 2004. "The business cycle and the life cycle," Working Paper 0404, Federal Reserve Bank of Cleveland.
  12. 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, vol. 83(4), pages 893-907, September.
  13. Patricia F. Apps & Ray Rees, 1999. "Individual versus Joint Taxation in Models with Household Production," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 393-403, April.
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