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Optimal Taxation and (Female)-Labor Force Participation over the Cycle

  • Jung, Philip

Optimal labor tax results over the cycle are, quantitatively, typically driven by an estimate of the intratemporal elasticity of substitution that governs the reaction of hours worked to business cycle shocks and tax rate changes. A recent literature tries to decompose this intratemporal elasticity into its main components, the "Ins and Outs of Unemployment" (Shimer(2007)) to emphasize the importance of the extensive margin. This paper provides a model that a.) endogenizes all transition rates including firings and quits on the job as well as movements in and out of inactivity, b.) explains the fluctuations in these rates quantitatively while allowing for differences across gender and c.) remains tractable and open to Ramsey-optimal policy. We estimate the model on US-data for the years 1970:1 to 2004:4 and show that the model predicts all labor market flows very well. We apply our model to show that observed labor tax rates over the cycle correspond fairly closely to the implied Ramsey-optimal ones.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8744.

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Date of creation: 01 Mar 2007
Date of revision: 13 May 2008
Handle: RePEc:pra:mprapa:8744
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  1. James S. Costain & Michael Reiter, 2003. "Business Cycles, Unemployment Insurance, and the Calibration of Matching Models," CESifo Working Paper Series 1008, CESifo Group Munich.
  2. Olivier Blanchard & Jordi Gali, 2008. "Labor Markets and Monetary Policy: A New-Keynesian Model with Unemployment," NBER Working Papers 13897, National Bureau of Economic Research, Inc.
  3. Marcus Hagedorn & Iourii Manovskii, 2007. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," IEW - Working Papers 351, Institute for Empirical Research in Economics - University of Zurich.
  4. Philip Jung, 2006. "Unemployment, Capital and Hours: On the quantitative performance of a DSGE," Computing in Economics and Finance 2006 123, Society for Computational Economics.
  5. Andrew Atkeson & V. V. Chari & Patrick J. Kehoe, 1999. "Taxing capital income: a bad idea," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-17.
  6. Mark Aguiar & Erik Hurst, 2007. "Measuring Trends in Leisure: The Allocation of Time Over Five Decades," The Quarterly Journal of Economics, Oxford University Press, vol. 122(3), pages 969-1006.
  7. Robert E. Hall & Paul R. Milgrom, 2005. "The Limited Influence of Unemployment on the Wage Bargain," NBER Working Papers 11245, National Bureau of Economic Research, Inc.
  8. David M. Arseneau & Sanjay K. Chugh, 2006. "Ramsey meets Hosios: the optimal capital tax and labor market efficiency," International Finance Discussion Papers 870, Board of Governors of the Federal Reserve System (U.S.).
  9. Pietro Garibaldi & Etienne Wasmer, 2005. "Equilibrium Search Unemployment, Endogenous Participation and Labor Market Flows," Post-Print hal-01020784, HAL.
  10. Shigeru Fujita & Garey Ramey, 2007. "Reassessing the Shimer facts," Working Papers 07-2, Federal Reserve Bank of Philadelphia.
  11. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1991. "Optimal Fiscal and Monetary Policy: Some Recent Results," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 519-39, August.
  12. Pierpaolo Benigno & Michael Woodford, 2006. "Linear-Quadratic Approximation of Optimal Policy Problems," NBER Working Papers 12672, National Bureau of Economic Research, Inc.
  13. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
  14. Gomme, Paul & Klein, Paul, 2011. "Second-order approximation of dynamic models without the use of tensors," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 604-615, April.
  15. Bruce C. Fallick & Charles A. Fleischman, 2004. "Employer-to-employer flows in the U.S. labor market: the complete picture of gross worker flows," Finance and Economics Discussion Series 2004-34, Board of Governors of the Federal Reserve System (U.S.).
  16. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  17. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  18. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
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