Labor supply responses to marginal Social Security benefits: Evidence from discontinuities

A key question for Social Security reform is whether workers respond to the link on the margin between the Social Security taxes they pay and the Social Security benefits they will receive. We estimate the effects of the marginal Social Security benefits that accrue with additional earnings on three measures of labor supply: retirement age, hours, and labor earnings. We develop a new approach to identifying these incentive effects by exploiting five provisions in the Social Security benefit rules that generate discontinuities in marginal benefits or non-linearities in marginal benefits that converge to discontinuities as uncertainty about the future is resolved. We find that individuals approaching retirement (age 52 and older) respond to the Social Security tax-benefit link on the extensive margin of their labor supply decisions: we estimate that a 10% increase in the net-of-tax share reduces the two-year retirement hazard by a statistically significant 2.0 percentage points from a base rate of 15%. The evidence with regard to labor supply responses on the intensive margin is more mixed: we estimate that the elasticity of hours with respect to the net-of-tax share is 0.42 and statistically significant, but we do not find a statistically significant earnings elasticity. Though we lack statistical power to estimate results within subsamples precisely, the retirement response is driven mostly by the female subsample, while the hours response comes from the male subsample.     

Market Work, Home Work, and Taxes: A Cross-Country Analysis

This paper uses a simple model of labor supply extended to allow for home production to understand the extent to which differences in taxes can account for differences in time allocations between the US and Europe. Once home production is included, the elasticity of substitution between consumption and leisure is almost irrelevant in determining the response of market hours to higher taxes. But to account for observed differences in leisure and time spent in home production, one still requires a relatively large elasticity of substitution between consumption and leisure, combined with a relatively small elasticity of substitution between time and goods in home production.     

The impact of fiscal policies on agricultural household decisions

This paper provides a comparative static analysis of farm household's production, consumption, and labor market decisions under alternative tax policies. We explore the implications of non-separable household decisions caused by widespread non-participation in labor, land, financial and/or food markets, as is typical of low income economies. The analytical results indicate that when labor market imperfections occur, most tax-induced responses are ambiguous, mainly due to shadow price effects. This is particularly the case for the labor market and production responses to most tax tools under study, while a decreasing demand for consumption goods appears to be the result in several cases. Furthermore, tax-induced allocation effects may differ between the non-separable and the separable model versions, indicating the potential impact of labor market constraints on farm household responses to tax policies. In particular, standard taxes as well as a land tax may imply production adjustments in the case of non-separability.     

The effect of working time and labor force participation on unemployment: A new argument in an old debate

This paper introduces a new argument into the theoretical literature on labor market effects of changes in working hours and labor force participation. We advance a general equilibrium model in which increased labor supply reduces unskilled unemployment via consumer demand: longer work hours and higher labor force participation imply higher incomes and less (leisure) time. In consequence, home production is reduced in favor of outsourcing domestic tasks to the market, shifting consumer demand toward unskill-intensive goods. Relative demand for unskilled labor rises and unemployment falls.     

Consumption aspirations in dirty and clean goods and economic growth

This paper builds a two-sector, two-factor environmental model in which agents optimally choose the clean and dirty goods in order to display their social status. In contrast to the conventional notion, we show that greater social aspirations in consumption regardless of either clean or dirty goods have an ambiguous impact on growth, depending on whether the production of conspicuous goods is relatively labor- or capital-intensive, whether the production of conspicuous goods generates more or fewer emissions, and whether labor supply is or is not responsive to social status seeking. By connecting two conflicting aspects of consumer preference involving social aspirations and environmental concerns, our analysis offers a novel explanation for the environmental Kuznets curve and a theoretical support for the empirical possibility of a negative employment-growth relationship and the so-called Green New Deal. Our welfare analysis shows that social comparisons in consumption may increase, rather than decrease, social welfare. The Pigovian tax may only be socially sub-optimal in the two-sector economy because it is unable to completely correct the distortion caused by consumption externalities.     

Public consumer goods, output-generated variable returns, and labor supply

This paper develops a simple general-equilibrium model of a closed economy. The economy under consideration produces two final goods, one private and one public, which are both produced with labor and an intermediate good under constant returns to scale. The intermediate good is produced by labor alone, and its production is subject to output-generated variable returns to scale. The public good can be interpreted as government spending on environmental quality, police protection, cultural activities, and publicly funded health care. The model is used to examine the impact of an exogenous change in labor supply on the size of the government, relative prices, and welfare. Within the context of the present study, an increase in labor supply can be attributed to either exogenous immigration or population growth. The model is also used to examine the relationship between the size of the country and the pattern of trade.     

Non-neutral responses to money supply shocks when consumption and leisure are Pareto substitutes

Summary. To a greater extent than is often stressed in existing literature, preference assumptions affect responses to money shocks in equilibrium monetary models. Temporary money shocks can have persistent real effects if the marginal utility of leisure is a decreasing function of consumption, where leisure is measured as time endowment less market labor effort, and consumption refers to market produced goods. This condition is an empirically supported implication of home production models. Though not theoretically necessary for supporting the existence of short run real effects, the presence of distortionary taxes and endogenous productivity can have significant quantitative effects on responses to temporary money supply shocks. Received: August 21, 1996; revised version: February 3, 1997     

Competition,taxation and economic growth

The paper mainly examines the relationship between economic growth, tax policy and sectoral labor distribution in an endogenous growth model with expanding varieties. For analyzing these relationships, we consider an economy where three sectors of production are vertically integrated: final goods sector, intermediate goods sector and research sector. We show that the extent of imperfect competition in the intermediate products market affects both economic growth and the allocation of the available labor to all the sectors employing this input. The resources from capital taxation, which are used for financing research sector, have a U-shaped effect on growth and lead to a movement of the labor from research sector to final goods sector. Additionally, we show that if there exists a higher competitive structure in an economy, the probability of the positive effect of an increase in tax on growth gets higher.     

Soviet theories of economic demography: a survey

At this time Soviet demographic scientists maintain the position that population problems may in fact exist temporarily under socialism but that the planning principle will allow society to resolve population problems, through the use of the administrative, moral, and economic levers (subsidies, government policies, propaganda, education) emphasized by Urlanis (1974) and others. For planners to deal effectively with population management, the determinants of fertility and labor force participation must be established. The foundations of Soviet theories of human capital and fertility were laid by several writers. For the sake of simplicity, these are referred to as the Urlanis-Strumilin model, named after 2 pioneer researchers in Soviet demography and manpower economics. The formulations are based upon the writings of Strumlin (1964) and Urlanis (1974), supplemented by writings of numerous other Soviet researchers. Although their models avoid neoclassical terms such as marginal utility and income and price elasticities, they clearly employ these concepts. The Urlanis-Strumilin model, reduced to its basic elements, is a direct household utility maximizing model. The husband and wife, the household decision makers, must select optimal levels of child "quantity," child "quality," leisure, their own human capital (further education and training), and other goods. The Soviet theory recognizes that an increase in household income will increase relatively the demands for income elastic goods. The model postulates that the demand for child quality is inversely related to the price of children. The price of children is the opportunity cost of children, the major element of which is the income foregone by the mother in the course of childbearing and childrearing. The child quantity demand schedule has elastic and inelastic portions. The marginal utility of the 1st child is great. The marginal utilities of higher order children decline substantially. Families with at least 1 child can make substitutions between having more children and raising the quality of children already born. The question is what does the model predict will happen to fertility with economic development. The positive income effect will be limited as increased income is channelled into child quality and other superior goods rather than child quantity. The Urlanis-Strumilin model of labor supply assumes that the household allocates its time among market employment, household production. The model shows that the effect of children on female labor supply is not ambiguous. The presence of young children raises the value of home services and lowers long run market wages, thereby reducing female market labor supply. According to the model, the socialist state can manipulate labor supplies through several channels. It can reduce the value of home services by providing market substitutes. Soviet writers recognize the linkages between labor supply and fertility without formalizing the simultaneous relationship. The comparative statics of the Soviet model are essentially the same as those of the neoclassical model: an increase in "costs" of children will have, at best, a small positive impact on fertility.     

Does Government Expenditure Crowd Out Private Consumption in Italy? Evidence from a Microeconomic Model

An abnormal expansion of the public sector may create serious problems to the market economy, as the literature suggests. This issue is quite important in countries such as Italy where the size of the public sector and of its debt are quite relevant. In this paper a model, in the microeconomic tradition, is developed and applied to the italian economy using a quite general utility function to represent consumer's behaviour. The aim of the article is to set up a methological framework in which to test for the hypothesis that the provision of public and impure public goods crowds out private consumption. The main result of the analysis is that, in Italy, traditional public goods play a neutral role in expenditure decisions while impure public goods crowd out private consumption. This crowding out is created by over-production of these services; merit goods are direct complements to a wide range of private goods, but this beneficial effect is more than offset by the negative income effect related to their financing.     

Equilibrium unemployment and retirement

We first propose some new empirical evidence on the fact that the labor market conditions matter for the retirement decision at the individual level: we investigate whether unemployed workers retire before employed workers, other things being equal. Our main objective in this paper is then to propose an equilibrium unemployment approach to retirement decisions that allows us to derive the positive and normative features of retirement decisions when search and matching frictions are considered. Two main conclusions emerge: the retirement decision of unemployed workers depends on the labor-market frictions whereas that of employed workers does not; the existence of search externalities makes the retirement age of unemployed workers intrinsically suboptimal. Considering Social Security policy issues, we show that the complete elimination of the implicit tax on continued activity is not necessarily welfare-optimizing in a second best world where the labor market equilibrium suffers from distortions.     

THE DIVISION OF LABOR AND ROUNDABOUT PRODUCTION: ALLYN YOUNG REVISITED

Abstract.  This paper investigates Allyn Young's two important doctrines concerning the division of labor and roundabout production. First, apart from advancing the state of knowledge, the progressive division of labor that can occur within a given population encourages the adoption of more specialized, differentiated intermediate goods in the production process. Second, the level of division of labor and the extent of the market depend on each other. Using a general equilibrium model with increasing returns to specialization, economies of complementarity between intermediate goods, and transaction costs, we demonstrate that the level of division of labor and the number of intermediate goods increase concurrently as transaction conditions are improved.     

Effects of subsidies on growth and welfare in a quality-ladder model with elastic labor

This paper develops a quality-ladder growth model with elastic labor supply and distortionary taxes to analyze the effects of different subsidy instruments: subsidies to the production of final goods, subsidies to the purchase of intermediate goods, and subsidies to research and development (R&D). Moreover, the model is calibrated to the US data to compare the growth and welfare implications of these subsidies. The main results are as follows. First, we analytically show that an optimal coordination of all instruments attains the first-best outcome. Second, in the calibrated economy, we numerically find that for the use of a single instrument, R&D subsidy is less growth-enhancing and welfare-improving than the other subsidies, whereas for the use of a mix of two instruments, subsidizing the production of final goods and the purchase of intermediate goods is most effective in promoting growth but least effective in raising welfare.     

The effect of social security,health, demography and technology on retirement

This article studies the determinants of the labor force participation of the elderly and investigates the factors that may account for the increase in retirement in the second half of the last century. We develop a lifecycle general equilibrium model with endogenous retirement that embeds Social Security legislation and Medicare. Individuals are ex ante heterogeneous with respect to their preferences for leisure and face uncertainty about labor productivity, health status and out-of-pocket medical expenses. The model is calibrated to the U.S. economy in 2000 and is able to reproduce very closely the retirement behavior of the American population. It reproduces the peaks in the distribution of Social Security applications at ages 62 and 65 and the observed facts that low earners and unhealthy individuals retire earlier. It also matches very closely the increase in retirement from 1950 to 2000. Changes in Social Security policy – which became much more generous – and the introduction of Medicare account for most of the expansion of retirement. In contrast, the isolated impact of the increase in longevity was a delaying of retirement.     

Average-cost Pricing, Increasing Returns, and Optimal Output: Comparing Home and Market Production

We employ a model with both market production and home production to show that, ignoring administrative costs and indirect effects (such as rent-seeking), even if both the home and the market sectors have the condition of increasing returns and there are no pre-existing taxes, it is still efficient to tax the home sector to finance a subsidy on the market sector to offset the under-production of the latter due to the failure of price-taking consumers to take account of the effects of higher consumption in reducing the average costs and hence prices, through increasing returns or the publicness nature of fixed costs. Within market production, it is efficient to subsidise more the sector with a higher fixed cost, a lower elasticity of substitution between goods (higher value of diversity), and a lower degree of importance in preference, which all increase the degree of increasing returns.     

SOCIAL SECURITY BENEFITS AS A RETIREMENT RESOURCE FOR U.S. NEAR-RETIREES

This paper analyzes Social Security benefits as a retirement resource (wealth and income) for U.S. near-retirees. We look at how the average values of several measures of benefits such as Social Security wealth and earnings replacement rates have changed from earlier cohorts to today's near-retirement cohort, examine differences among demographic and socioeconomic groups within cohorts, and discuss reasons for these changes and differences. We use improved data (actual earnings history data) to produce more accurate measures of benefits. The paper also uses some new benefit measures. Three key findings are: (1) average real Social Security wealth increases markedly as we move to later cohorts primarily because of increases in average real lifetime earnings; (2) replacement rates fall as we move from the cohorts of persons reaching 61 in 1993–97 to later cohorts primarily because of the phase-in of increases in the age of eligibility for full benefits and the increasing labor market activity of women; and (3) median Social Security wealth is much higher for women than for men because women live longer.     

Investment in Infrastructure and Effects of Tourism Boom

This paper develops a dynamic trade model of a small open economy with productivity effects of public infrastructure and inbound tourism (i.e. foreign visitors' consumption of nontradable goods produced in the home country). It is shown that the economy either specializes in the production of the nontradable good or diversifies production. In the case of specialization, a tourism boom, i.e. an increase in the foreign tourists' demand for the nontradable good, makes the economy better off. In the case of diversified production, by contrast, a tourism boom induces a deterioration in the terms of trade and the economy may be worse off.     

Intergenerational Allocation of Government Expenditures: Externalities and Optimal Taxation

This paper studies optimal capital and labor income taxes when the benefits of public goods are age‐dependent. Provided the government can impose a consumption tax, it can attain the first‐best resource allocation. This involves the uniform taxation of the cohorts' labor income and a zero capital income tax. With no consumption tax and optimally chosen government spending, labor income should be taxed nonuniformly across cohorts and the capital income tax should be nonzero. Deviations of the public goods from their respective optima create distortions. These affect the labor supply decisions of both cohorts and capital accumulation, providing a further reason to tax (or subsidize) capital income.     

Financial Markets and Stochastic Growth

The authors study the effect of financial markets on the investment of a two-good two-country economy with stochastic production in a dynamic framework. Each country produces and invests only one good and, therefore, makes decisions as a central planner in an optimal growth model. Trade between consumers of both countries, however, takes place on competitive (spot or financial) markets. The authors compare the investment–consumption decisions of both "market" models with the benchmark case of an integrated world-equilibrium. In the log-linear case, it is possible to uniquely characterize the state-dependent preferences of consumers that lead to dynamically efficient investment decisions. It is shown that the investment decisions in both "market" models are, in general, inefficient compared with the efficient, or integrated world economy, case.     

Inflation in Argentina during the 2000s

The paper presents a neo-structuralist econometric analysis of the monthly inflation rates. The model breaks down the CPI into different components based on their price-formation mechanisms. The basic breakdown defines three components: PFLEX (fruits and vegetables, 3.6% of the basket), PREGUL (prices regulated by the government, 20.1% of the basket) and PFIX (the rest of goods and services, 76.3% of the basket). PFIX is the focus of the econometric analysis while PFLEX and PREGUL are considered exogenous. The explanatory variables are the monthly rates of: the price of bovine cattle at the domestic market, the international soy price, the price by ton of imported intermediate goods, the nominal exchange rate, the average wage of workers that are registered in Social Security and the productivity, measured by the GDP by employed worker. There was an informal indexation mechanism in the labor market. Average monthly wages rose at annual rates that were almost always higher than the sum of past annual inflation plus the annual increase in productivity. The over-indexation of the unit labor cost was the main inflationary factor in the period. The inertial component, represented in the model by the previous monthly rate, determines 60% of the current rate.