The heterogeneous effects of labor informality on VAT revenues: Evidence on a developed country

The value-added tax is spread in many countries primarily because it allows rising public revenues, but its revenue performance can be undermined in the presence of informality. We document the existence of heterogeneous effects of labor informality on VAT collection in a developed country such as Italy. By using novel regional administrative data on VAT revenues, we find that labor informality produces negative effects on total VAT collection, including VAT on production and consumption, and positive effects on VAT revenues from consumption only. We also find that the consequences of labor informality on VAT collection depend on the size of informality, by approximating an-inverted U-relation. As for Italy, we explain such heterogeneous effects with the presence of regional differences in labor market conditions. We also document that labor informality has heterogeneous effects on VAT collection when considering specific productive sectors, and the cyclical consequences of the Great Recession.     

The impact of regional and sectoral labor market conditions on wages and labor supply — An empirical analysis for married women using West-German Panel data

In this paper we examine the effects of regional and industry specific labor market indicators on wages and labor supply of married females. Based on the standard life cycle labor supply theory we derive a two equation censored panel model and estimate it using the Minimum Distance Method.For our empirical analysis we use four waves (1984–1987) of West German Panel data merged with regional indicators and industry specific demand side indicators. We obtain the result that, unlike industry specific indicators, regional demand side conditions have virtually no significant effect on market wages but that a direct effect of regional labor market conditions on labour supply remains. We conclude that regional labor market conditions can directly constrain the individual labor supply decision.     

Employment effects of foreign acquisition

This paper investigates the employment effects of foreign acquisitions in acquired firms in Swedish manufacturing during the 1990s; a period characterized by a dramatic increase in foreign ownership. We find some evidence of positive employment effects in acquired firms and it seems that the employment of skilled labor increases more than that of less-skilled labor. Our results indicate that the positive employment effects are more pronounced in acquired non-MNEs than in Swedish MNEs. Furthermore, we observe shifts in skill intensities toward higher shares of skilled labor in non-MNEs taken over by foreign MNEs, but not in acquired Swedish MNEs.     

Consumption externalities, production externalities, and efficient capital accumulation under time non-separable preferences

The effects of consumption and production externalities on economic performance under time non-separable preferences are examined both theoretically and numerically. We show that a consumption externality alone has long-run distortionary effects if and only if labor is supplied elastically. With fixed labor supply, it has only transitional distortionary effects. Production externalities always generate long-run distortions, irrespective of labor supply. The optimal tax structure to correct for the distortions is characterized. We compare the implications of this model with those obtained when the consumption externality is contemporaneous. While some of the long-run effects are robust, there are also important qualitative and quantitative differences, particularly along transitional paths.     

Taxes and Marriage: A Two‐Sided Search Analysis*

This article analyzes the effects of differential tax treatment of married and single individuals in the United States on marriage formation and composition, divorce, and labor supply. We develop a marriage‐market model with search frictions and heterogeneous agents that is sufficiently rich to capture key elements of the problem under consideration. We then calibrate the model and use it to evaluate the quantitative effects of several tax reforms aimed at making the tax law neutral with respect to marital status. We find that these reforms (i) systematically increase the labor supply of married females, with changes ranging from 0.3 to 10.1 percent; (ii) have substantial effects on the correlation of spouses’ incomes, which changes from 0.2 to values between 0.185 and 0.334; (iii) can lead to either an increase or decrease in the fraction of people married, with changes that range from ?0.6 to 2.4 percent.     

The effect of the Israeli–Palestinian conflict on child labor and school attendance in the West Bank

In this paper we analyze the impact of the Israeli–Palestinian conflict on child labor and school attendance of Palestinian children in the West Bank between the beginning of the Al-Aqsa Intifada (September 2000) and the end of 2006. In particular, we investigate the effects, on children' s status, of number of days Israel closed its border with Palestinian Territories. We find that an increase in the number of closure days increases child labor while it (weakly) reduces school attendance in the West Bank. We provide evidence on different mechanisms that possibly account for these results.     

Reassessing the effects of environmental taxation when pollution affects health over the life-cycle

We introduce the link between pollution, morbidity and productivity over the life-cycle in a two-period overlapping generations model. As the environmental tax improves the health-profile over the life-cycle, it influences saving, investment in health, labor supply and retirement. As a result, we identify effects of environmental taxation beyond the standard crowding-out and productivity effects captured by the past literature. We show that whether those effects are positive or negative for the economy crucially depends on the degree of substitutability between young and old labor. Our numerical examples suggest that that those new effects alleviate the negative effects of environmental taxation on output and decrease potential positive welfare effects.     

Investment Crowding‐Out and Labor Market Effects of Financialization in the US

This paper studies the impact of financialization on unemployment in the United States. We estimate a dynamic multi‐equation macro labor model including labor demand, labor suppy, wage‐setting, and capital accumulation equations. Financialization appears as a key determinant of capital accumulation which, in turn, is the transmission channel toward its unemployment effects. We conduct a series of counterfactual simulations where we quantify the macroeconomic consequences of the recent swings experienced by the financialization process. We find that it has had relevant unemployment effects in all periods considered, even in those where financial payments were not the main driver of capital accumulation. We also identify a structural change in the financialization process in the early 1980s, and find that it has caused USA unemployment to systematically fluctuate around 2 percentage points above what it would otherwise have done. We call for a reappraisal of the way financial markets work, and stress the vital need of preventing financial devices that result in productive investment crowding‐out.     

Human capital, market imperfections, and labor reallocation in transition

In this paper, we investigate the effects of human capital and factor market imperfections on household decisions regarding labor use and reallocation in transition countries. We develop a model that accounts explicitly for heterogeneity in the supply of labor and analyze its impact on the allocation of labor. Furthermore, the effects of imperfections in the capital and labor markets on the reallocation process are modeled. Using a dataset based on a countrywide representative survey of Hungarian rural households, we estimate the effects empirically and find them to be important. Journal of Comparative Economics 32 (4) (2004) 745–774.     

Indeterminacy, underground activities and tax evasion

This paper introduces underground activities and tax evasion into a one-sector dynamic general equilibrium model with aggregate external effects. The model presents a novel mechanism driving the self-fulfilling prophecies, which is characterized by well behaved (downward sloping) labor demand schedules. This mechanism differs from the customary one, and it is complementary to it. Compared to traditional labor market income, the income derived from underground labor activity is subject to a lower expected tax rate when considering both the probability of detection and the evasion penalty. During a belief-driven expansion, the household allocates more time to both traditional and underground labor supply. In equilibrium, this action serves to lower the effective labor tax rate faced by the household, thus providing stimulus to aggregate labor supply so as to make the initial expansion self-fulfilling. The mechanism here is akin to a “regressive tax”; the household's effective tax rate depends negatively on the level of total labor income. We argue that an underground sector, and the associated tax evasion, offer a good economic rationale for a regressive tax rate.     

Trade Sanctions and the Incidence of Child Labor

The purpose of this paper is to develop an imperfect competition model of a small open developing country to analyze the effects of trade sanctions on the incidence of child labor. We show that a uniform tariff levied by the developed countries on imports produced with the help of child labor is a failure in terms of reducing child labor. A more effective course of action would be a firm‐specific tariff where the tariff rate varies with the amount of child labor incorporated in a single good. While such an instrument reduces child labor, however, it worsens the children’s well‐being due to lower income and consumption. Contrary to expectations, the entrepreneurs in the developing countries, supposedly the main beneficiaries of child labor, are better off under trade sanctions as they realize higher profits.     

Consumption externalities,production externalities,and long-run macroeconomic efficiency

We analyze the effects of consumption and production externalities on capital accumulation. We show that the importance of consumption externalities depends upon the elasticity of labor supply. If the labor supply is inelastic, consumption externalities cause no long-run distortions. Whether there are distortions along the transitional path depends upon consumer preferences. The effects of production externalities are more pervasive; they exert long-run distortionary effects irrespective of labor supply. The optimal taxation to correct for the distortions created by the externalities is characterized. We analyze both stationary and endogenously growing economies, and while there are many parallels in how externalities impact, there are also important differences.     

The consequences of labor market flexibility: Panel evidence based on survey data

We introduce a new data set on hiring and firing restrictions for 21 OECD countries for the period 1984-1990. The data are based on surveys of business people in the countries covered, so the indices we use are subjective in nature. Controlling for country and time fixed effects, and using dynamic panel data techniques, we find evidence that increasing the flexibility of the labor market increases both the employment rate and the rate of participation in the labor force. A conservative estimate suggests that if France were to make its labor markets as flexible as those in the US, its employment rate would increase 1.6 percentage points, or 14% of the employment gap between the two countries. The estimated effects are larger in the female than in the male labor market, although both groups seem to have similar long-run coefficients. There is also some evidence that more flexibility leads to lower unemployment rates and to lower rates of long-term unemployment. We also find evidence consistent with the hypothesis that inflexible labor markets produce “jobless recoveries” and introduce more unemployment persistence.     

The effect of the timing and spacing of births on the level of labor market involvement of married women

We analyze the effect of the timing and spacing of births on the labor supply of married women in a framework that accounts for the endogeneity of the labor market and fertility decisions, for the heterogeneity of the effects of children on labor supply and their correlation with the fertility decisions, and for the correlation of sequential labor market decisions. Delaying the first birth leads to higher pre-natal levels of labor market involvement and reduces the negative effect of the first child on labor supply. The effect of the second child increases with the spacing of the two births as women, returning to work after the first birth, finance child care time increasingly through reductions in market time. Individual heterogeneity is considerable; women with lower propensity for children have the first birth later in life and space subsequent births more closely together, work more before the birth of the first child, but face larger effects of children on their labor supply.     

Migration and imperfect labor markets: Theory and cross-country evidence from Denmark,Germany and the UK

We investigate the labor market effects of immigration in Denmark, Germany and the UK, three countries which are characterized by considerable differences in labor market institutions and welfare states. Institutions such as collective bargaining, minimum wages, employment protection and unemployment benefits affect the way in which wages respond to labor supply shocks, and, hence, the labor market effects of immigration. We employ a wage-setting approach which assumes that wages decline with the unemployment rate, albeit imperfectly. We find that the wage and employment effects of immigration depend on wage flexibility and the composition of the labor supply shock. In Germany immigration involves only moderate wage, but large unemployment effects, since immigrants are concentrated in labor market segments with low wage flexibility. The reverse is true for the UK and Denmark.     

Flows of Air Pollution,Ill Health and Welfare

We provide a theoretical framework for measuring welfare when pollution influences economic growth by impairing health and driving up defensive medical expenditures. We demonstrate the usefulness of our framework in practice by applying it to data from Swedish valuation studies designed according to the accounting principles suggested here. We estimate that the negative health effects of nitrogen dioxide emissions amount to 0.6% of GDP in Sweden. We also show that a corrective Pigouvian tax should internalize the direct disutility, reduced labor productivity, and increased healthcare expenditures caused by pollution. According to our calculations, harmful health impacts alone (excluding ecosystem effects) justify 65% of the current Swedish tax on nitrogen dioxide.      

Micro and macro elasticities in a life cycle model with taxes

We build a life cycle model of labor supply that incorporates changes along both the intensive and extensive margin and use it to assess the consequences of changes in tax and transfer policies on equilibrium hours of work. We find that changes in taxes have large aggregate effects on hours of work. Moreover, we find that there is no inconsistency between this result and the empirical finding of small labor elasticities for prime age workers. In our model, micro and macro elasticities are effectively unrelated. Our model is also consistent with other cross-country patterns.     

Coaching,Counseling, Case‐Working: Do They Help the Older Unemployed Out of Benefit Receipt and Back Into the Labor Market?

Intensified counseling, job search assistance and related policies have been found to be effective for labor market integration of the unemployed by a large number of studies, but the evidence for older and hard‐to‐place unemployed is more mixed. In this paper, we present key results for a large‐scale active labor market program directed at the older unemployed in Germany. To identify the treatment effects, we exploit regional variation in program participation. We use a combination of different evaluation estimators to check the sensitivity of the results to selection, substitution and local labor market effects. We find positive effects of the program in the range of 5–10 percentage points on integration into unsubsidized employment. However, there are also substantial lock‐in effects, such that program participants have a higher probability of remaining on public welfare benefit receipt for up to 1 year after commencing the program.     

The Effects of Trade Liberalization in a Vertical Structure

Despite the importance of international trade on intermediate goods, the literature did not pay much attention to this aspect in determining the effects of trade liberalization in the presence of a labor union. We take up this issue here and show the effects of trade liberalization on the final goods and/or the intermediate goods, where the domestic firm pays unionized wage and imports intermediate goods. We show that trade liberalization on the intermediate goods (final goods) increases (decreases) the unionized wage, labor union's utility and domestic profit. Trade liberalization on both the final goods and intermediate goods may either increase or decrease the domestic unionized wage, labor union's utility and domestic profit depending on the input coefficients and the initial tariff levels. Our qualitative results are robust with respect to the intermediate goods market structure, the pricing strategy of the intermediate goods producers and the union's objective function.     

Legal competition, political process and irreversible investment decisions

We compare the effects of competition for the design of labor laws in an environment characterized by irreversible investments in human and physical capital. We compare autarky with two-country cases, assuming that capital is mobile and labor immobile. We distinguish two cases. In the first, the political system is free from capture, while in the second, we examine the case where labor captures the institutional design problem. We find that in the former case legal competition reduces welfare while in the latter it improves the overall outcome.