On the Effects of Wage Pressure on the Unemployment Rate and Capital Share

Abstract. The purpose of this paper is to understand the behaviour of the capital share and the unemployment rate in Europe over the past quarter of a century. We consider a model with monopolistic competition, increasing returns and an imperfect labour market, assuming that the elasticity between capital and labour is less than unity. Previous works have generally assumed constant returns to scale. Our results offer an important conclusion, namely that increased wage pressure will increase the unemployment rate and the capital share even though the latter initially decreases, which fits the stylized facts about the studied economies.     

Capital tax,minimum wage,and labor market outcomes

Often an increase in the minimum wage is accompanied by a reduction in the capital tax. This paper analyzes the effects of interactions between the minimum wage and the capital tax in the general equilibrium framework. The analysis is conducted in an inter-temporal search model in which firms post wages. A (binding) minimum wage provides a lower support for the distribution of wages. The paper finds that the interaction of these two policy instruments significantly modify labor market outcomes and welfare cost. In the presence of a binding minimum wage, a decrease in the capital tax leads to an increase in wage dispersion. In contrast, when it is not binding, a lower capital tax may reduce the dispersion in wages. A binding minimum wage magnifies the positive effects of a lower capital tax on labor supply, employment, and output. It also enhances the welfare cost of capital tax. A policy change which involves an increase in the minimum wage and a fall in the capital tax such that employment level remains constant increases welfare and output.     

Capital–skill complementarity and the immigration surplus

We build a neoclassical growth model with overlapping dynasties and capital–skill complementarities to evaluate changes in immigration policy. Calibrating the model using US data, we quantify the differential effects of skilled and unskilled immigration on factor returns and on the welfare of different sectors of the population. An influx of high-skilled immigrants lowers the wages of skilled workers, raises the wages of unskilled workers, and because of the relative complementarity between capital and skilled labor, substantially raises the rate of return to native-owned capital. By contrast, an influx of unskilled immigrants produces an opposite effect on wages, and has only a negligible effect on the return to capital. Because of capital–skill complementarity, an increase in the number of skilled immigrants generates an immigration surplus—the overall welfare benefit accruing to the native population—that is approximately ten times larger than the immigration surplus generated by an identical increase in the number of unskilled immigrants. This differential welfare effect is far higher than can be accounted for by the disparity between the productivities of each type of worker.     

Household Transport Demand in a CGE-framework

The main objective of this study is to improve the modelling of household demand for transport services in a Computable General Equilibrium (CGE) model. The new extended model is then used for numerical calculations to test how the Swedish economy reacts to a carbon target. Special attention will be given to distributional effects and the connection between labour supply and work journeys in a sparsely populated country like Sweden. A differentiation between trip purposes and trip length, a complementary relationship between work journeys and labour supply, and a subdivision of households by density of population and income influence the numerical results. Our main conclusions from the analysis of a carbon target are that if the carbon tax revenue is recycled by decreasing the employers’ social contribution fee, welfare costs are lower than with lump-sum replacements of tax revenue to households. The welfare cost may be reduced even further if work journeys are not additionally taxed as compared to the base year. However, the lower total welfare cost is obtained at the expense of making society more unequal, since both labour tax recycling (cuts in employers’ social contributions) and exempting tax on work journeys will make low income groups carry a higher burden. An increased carbon dioxide tax is also shown to increase welfare differences between sparsely populated areas and city regions in Sweden.      

The Household, Time Use and Tax Policy

This paper is concerned with modelling household decisions andthe welfare effects of tax policy. It seeks to emphasise theimportance of a model that incorporates household productionand can take account of the evident female labour supply heterogeneityacross two-parent families. If, after having children, someproportion of households substitute domestic for market laboursupply, the income and consumption variables used as the taxbase in most countries may be poorly correlated with livingstandards. Taxes and welfare programs based on these variablesmay increase inequality by shifting the overall tax burden tolow and middle wage families with both partners in work, awayfrom families with much higher wages and in which only one memberworks to earn the same joint market income. The paper combinesdata on time use, income, taxes and benefits to show how theytrack female labour supply over the life cycle, resulting inmuch higher tax burdens on two-earner households. (JEL D13,D91, H31, J22)     

Modelling the distribution of returns on higher education: A microsimulation approach

Cost-sharing policies for higher education have been implemented in several countries in various ways. We argue that to assess their appropriateness and facilitate their implementation it is necessary to develop statistical indicators of the distribution of returns. When starting a higher education programme, the return on a particular degree is uncertain, and risk-adverse students or those from low-income families may be reluctant to enrol if this means taking out a loan. These statistical indicators would therefore be natural inputs of cost-sharing policies intended to preserve the individual economic incentives to go to university and simultaneously provide an insurance role. We present a dynamic microsimulation model of individual lifetime educational output in the French labour market which uses econometric modelling of individual wages, labour market transitions, social security contributions and benefits. It relies largely on labour force survey data and mortality tables. In the standard internal rate of return framework, the model is used to compute the distribution of returns to higher education, for a given generation. The results show that the percentage of negative returns is close to 3.5%.     

Optimal nonlinear income taxation with learning-by-doing

This paper examines a two-period model of optimal nonlinear income taxation with learning-by-doing, in which second-period wages are an increasing function of first-period labour supply. We consider the cases when the government can and cannot commit to its second-period tax policy. In both cases, the canonical Mirrlees/Stiglitz results regarding optimal marginal tax rates generally no longer apply. In particular, if the government cannot commit and each consumer's skill-type is revealed, it is optimal to distort the high-skill type's labour supply downwards through a positive marginal tax rate to relax an incentive-compatibility constraint. Our analysis therefore identifies a setting in which a positive marginal tax rate on the highest-skill individual can be justified, despite its depressing effect on both labour supply and wages.     

Capital and Consumption Tax Reforms in a Small Open Economy

The effects of a reform in capital and consumption taxes on private welfare and government tax revenue are examined for a small open, capital‐importing economy. A trade‐off between private welfare and tax revenue is encountered in maximizing social welfare. Nonetheless, lowering capital taxes and raising consumption taxes can increase both private welfare and tax revenue if the initial tax rates are not optimal. In addition, a tax reform by this fashion is a likely response to a rise in the foreign rate of return on capital.     

Employment Subsidy with Capital Mobility

Most models of tax competition assume full employment. Yet, actually one often observes that fiscal competition, particularly when it is aimed at attracting investment, is motivated by the concern of fighting unemployment and enhancing job creation. The present paper considers a multicountry model with capital mobility and unemployment. Fiscal policy has two opposing objectives: financing unemployment insurance and increasing employment. In each country there is a majority vote on this policy.
The purpose of the paper is to analyse how opening borders to capital flows modifies the median voter's choice of the employment subsidy. Assuming that capital and labour are complements, economic integration is shown to raise the employment subsidy with fixed wages. This agrees with intuition as a larger employment subsidy attracts more capital. However, when wages are set by labour unions economic integration can change the median voter's choice in either direction.     

Demographic change, human capital and welfare

Projected demographic changes in the U.S. will reduce the share of the working-age population. Analyses based on standard OLG models predict that these changes will increase the capital-labor ratio. Hence, rates of return to capital decrease and wages increase, which has adverse welfare consequences for current cohorts who will be retired when the rate of return is low. This paper argues that adding endogenous human capital accumulation to the standard model dampens these forces. We find that this adjustment channel is quantitatively important. The standard model with exogenous human capital predicts welfare losses up to 12.5% (5.6%) of lifetime consumption, when contribution (replacement) rates to the pension system are kept constant. These numbers reduce to approximately 8.7% (4.4%) when human capital can endogenously adjust.     

Labour-supply impacts of effective welfare programme parameters: a reanalysis

We quantify the impact of effective welfare programme parameters on the labour supply of single female household heads – the primary group of welfare recipients in the USA. Our panel of data is derived from the US Census Bureau's Current Population Survey for the years 1979 to 1990 inclusive. Behavioural impacts from a range of economic variables are consistent in sign with predictions made by economic theory. We find that effective welfare gurantee levels and the effective tax rate on earned income both significantly decrease labour supply. The marginal effects of these welfare programme parameters are economically small: a US$1000 increase in the expected welfare guarantee level reduces annual labour supply by about 36 hours; a 10 percentage point increase in the effective tax rate on earned income reduces annual labour supply by about 7.5 hours.     

Tax reforms under market distortions in product and labour markets

Using a two-agent model comprised of capitalists and workers, this paper examines the importance of imperfect competition in product and labour markets in determining the welfare effects of tax reform. The reform considered consists of eliminating the capital tax alongside a concurrent rise in the labour tax. In contrast to the perfectly competitive model, models with product or labour market failures each result in welfare losses for the workers in the long-run. In a realistic calibration to the UK economy, combining these imperfections implies that this tax reform will be Pareto improving in the long-run. However, these welfare gains over longer time horizons come at the cost of short-run losses, which, consistent with previous research, result in welfare losses for workers post-reform.     

Female labour force participation in an era of organizational and technological change

Abstract The supply of skilled female labour increased significantly at the beginning of the twentieth century as women assumed positions in the newly created clerical workforce. Evidence suggests that despite this increase in labour supply, the wage paid to female clerical workers increased over the period and that the ratio of female clerical wages to male manufacturing wages was roughly constant. These labour market facts can be accounted for in a dynamic general equilibrium model in which an exogenous increase in human capital induces an increase in demand for skilled clerical workers. While induced technological change that favours skilled workers may account for the observed increase in female real wages, explaining the stagnate relative weekly wages paid to female clerical workers requires a framework that includes organizational change.     

The effects of labour unions on international capital tax competition

Abstract We analyze the impact of labour market rigidities on tax competition between two imperfectly integrated countries. Following a shift from a competitive to a unionized labour market in both countries, the capital tax can be adjusted upward in the country with the less rigid labour market, whereas the capital tax is always adjusted downward in the other country. Moreover, by reducing the labour cost differential between countries, trade liberalization gives rise to tax and welfare convergences. Finally, when a country adopts a flexible labour market, the unionized country may attract the majority of capital.     

MACROECONOMIC AND REDISTRIBUTIONAL EFFECTS OF CONSUMPTION TAXES IN THE USA*

This paper studies the effect of an increase in consumption taxes using a dynamic general equilibrium model of overlapping generations calibrated to the US economy. When the proceeds are used to reduce income taxes, the reform raises the aggregate capital and labour supply in the long run. Workers increase labour supply immediately in response to the reform, while consumption rises only gradually. The tax reform also transfers wealth from old consumers to young consumers. As a result, while future generations experience significant welfare gains, current generations, particularly old consumers, tend to experience sizable welfare losses. When the proceeds are used for a lump‐sum transfer, the aggregate capital and labour both decrease in the long run. This reform is welfare‐improving for the current low‐income households.     

The impact of taxes on female labour supply

There is little agreement in economics on the factors influencing labour supply and hence on the impact of taxes. Within the marginal model, real wages and incomes are directing people's labour market behaviour independent of time and space, whereas the human resources approach takes account of the social environment and past behaviour. Even if strong assumptions are made, the neoclassical theory cannot predict the outcome of a wage increase. The labour supply response depends on the relative strengths of the substitution and the income effect. Since nonparticipation in the labour market is explained by a reservation wage being higher than the market wage, this is the only situation in which neoclassical theory would predict a rise in labour force participation with a wage increase. This case occured in a ‘natural experiment’ in Sweden. The Swedish tax system changed in 1971 from joint to separate taxation of spouses resulting in a substantial increase in the net wage of married women. This article investigates the impact of the change in the Swedish tax system on female labour force participation, concluding that it cannot explain the substantial rise in the participation rates of Swedish women. This is a significant result, questioning standard neoclassical theory and supporting the more institutional views of human labour market behaviour. That is that time and space as well as the social environment are important when analyzing labour supply. This will have consequences for international comparisons. Only factors which explain developments within one country might be relevant for explaining international differences, e.g. in labour force participation.     

Estimating labour supply responses and welfare participation: Using a natural experiment to validate a structural labour supply model

We estimate an economic model of labour supply and welfare participation using data on single men from Quebec drawn from the 1986 Canadian Census. Detailed budget sets for each work‐welfare combination—accounting for income taxes, tax credits and welfare benefit rules—are derived using a micro‐simulation model. We show that predicted reactions to a welfare reform that took place in 1989 replicate actual changes in labour supply and welfare participation. We also illustrate the advantage of having estimated a structural model by showing how labour supply and welfare participation change when income taxes and benefit levels change.     

Globalization,Wage Volatility,and the Welfare of Workers*

This paper analyzes the effects of trade liberalization on the level and volatility of factor returns, in a model with identical technologies across industries and industry‐specific uncertainty. The results show an increase in the return to capital and, under certain conditions, a decline in the real wages and welfare of workers, along with an expansion of wage dispersion and volatility. Unlike the Solper–Samuelson mechanism, our results do not depend on the factor intensity of imports and exports and are borne out by all patterns of trade, including among industrialized countries, suggesting that the traditional analysis has missed some important linkages between trade and wages.     

Optimal taxation and discount rate for public investment in a growth setting

This paper studies the optimal policy of a government which maximizes intertemporal social welfare using such instruments as taxes on interest income and wages, and debt in conjunction with public investment. In doing so, it has to face a decentralized economy where in each generation individuals and firms are free to maximize their own objectives subject to their own private constraints. The welfare function is a sum of discounted generational utilities and its maximization is handled by using dynamic programming. From the first order conditions so derived, it appears that an optimal policy of taxation and public capital accumulation is that which sets the tax rates according to Ramsey's optimal taxation structure and which equates the rate of return on public investment to the rate of social time preference.     

Employment and wage dynamics in Estonia, 1989-951

This study monitors the effects of economic transition on wages and employment in a former Soviet Republic. Estonia's case is of particular interest because of its early adoption of relatively free labour market policies. Relative wages for the highest educated groups rose for all age groups. There were also rapid increases in returns to job experience, particularly at young ages. Increasing wage dispersion across human capital groups was accompanied by narrowing wage dispersion within human capital groups. Relative wages rose in sectors which gained relative employment, while they fell in shrinking sectors. In addition, there were large flows of labour between shrinking and growing sectors, suggesting that labour market equilibrating mechanisms developed very rapidly in Estonia.