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

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  • Jung, Philip

Abstract

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.

Suggested Citation

  • Jung, Philip, 2007. "Optimal Taxation and (Female)-Labor Force Participation over the Cycle," MPRA Paper 8744, University Library of Munich, Germany, revised 13 May 2008.
  • Handle: RePEc:pra:mprapa:8744
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    References listed on IDEAS

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    Cited by:

    1. Moritz Kuhn & Philip Jung, 2010. "Labor market rigidity and the transmission of business cycle shocks," 2010 Meeting Papers 595, Society for Economic Dynamics.

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    More about this item

    Keywords

    search theory; unemployment; hours worked;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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