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Optimal fiscal policy with labor selection

Author

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  • Chugh, Sanjay K.
  • Lechthaler, Wolfgang
  • Merkl, Christian

Abstract

This paper characterizes long-run and short-run optimal fiscal policy in the labor selection framework. In a calibrated non-Ramsey decentralized equilibrium, labor market volatility is inefficient. Keeping fixed the structural parameters, the Ramsey government achieves efficient labor market volatility; doing so requires labor-income tax volatility that is orders of magnitude larger than the tax-smoothing results based on Walrasian labor markets, but a few times smaller than the results based on search and matching markets. We analytically characterize selection-modelconsistent wedges and inefficiencies in order to understand optimal tax volatility.

Suggested Citation

  • Chugh, Sanjay K. & Lechthaler, Wolfgang & Merkl, Christian, 2016. "Optimal fiscal policy with labor selection," Kiel Working Papers 2030, Kiel Institute for the World Economy (IfW).
    • Handle: RePEc:zbw:ifwkwp:2030
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    References listed on IDEAS

    as
    1. Brown, Alessio & Merkl, Christian & Snower, Dennis, 2015. "An Incentive Theory Of Matching," Macroeconomic Dynamics, Cambridge University Press, vol. 19(03), pages 643-668, April.
    2. Philip Jung & Keith Kuester, 2015. "Optimal Labor-Market Policy in Recessions," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(2), pages 124-156, April.
    3. Matteo Cacciatore & Giuseppe Fiori, 2016. "The Macroeconomic Effects of Goods and Labor Marlet Deregulation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 1-24, April.
    4. Lechthaler, Wolfgang & Merkl, Christian & Snower, Dennis J., 2010. "Monetary persistence and the labor market: A new perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 968-983, May.
    5. David M. Arseneau & Ryan Chahrour & Sanjay K. Chugh & Alan Finkelstein Shapiro, 2015. "Optimal Fiscal and Monetary Policy in Customer Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(4), pages 617-672, June.
    6. Joseph E. Stiglitz, 2015. "In Praise of Frank Ramsey's Contribution to the Theory of Taxation," Economic Journal, Royal Economic Society, vol. 0(583), pages 235-268, March.
    7. Sanjay K. Chugh & Christian Merkl, 2016. "Efficiency And Labor Market Dynamics In A Model Of Labor Selection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 1371-1404, November.
    8. Stefania Albanesi & Roc Armenter, 2012. "Intertemporal Distortions in the Second Best," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1271-1307.
    9. Ester Faia & Wolfgang Lechthaler & Christian Merkl, 2014. "Labor Selection, Turnover Costs, and Optimal Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(1), pages 115-144, February.
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    11. Correia, Isabel H., 1996. "Should capital income be taxed in the steady state?," Journal of Public Economics, Elsevier, vol. 60(1), pages 147-151, April.
    12. Den Haan, Wouter J. & Kaltenbrunner, Georg, 2009. "Anticipated growth and business cycles in matching models," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 309-327, April.
    13. Ljungqvist, Lars & Sargent, Thomas J., 2012. "Recursive Macroeconomic Theory, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262018748, November.
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    Cited by:

    1. Kohlbrecher, Britta & Merkl, Christian, 2016. "Business Cycle Asymmetries and the Labor Market," IZA Discussion Papers 9816, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    labor market frictions; hiring costs; efficiency; optimal taxation; labor wedge; zero intertemporal distortions;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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