Nominal GDP Targeting with Heterogeneous Labor Supply

We study nominal gross domestic product (GDP) targeting as optimal monetary policy in a model with a credit market friction following Azariadis et al. (2018), henceforth ABSS. We extend the ABSS framework to allow for heterogeneous labor supply. We show that nominal GDP targeting continues to characterize optimal monetary policy in this setting. We also analyze the incomplete markets equilibrium that exists when the monetary policymaker pursues a suboptimal policy, and show how an extension to more general preferences can limit the ability of the policymaker to provide full insurance to households in this setting.     

The Shadow Margins of Labor Market Slack

We use a mix of new and existing data to develop the Aggregate Hours Gap (AHG), a novel measure of labor market underutilization. Our measure differentiates individuals by detailed categories of labor market participation and uses data on their desired work hours as a measure of their potential labor supply. We show that desired hours vary widely by demographics and detailed labor force status, and that the gap between desired and actual work hours is strongly positively correlated with reported search effort. The AHG suggests a more sluggish labor market recovery since the Great Recession than either the official unemployment rate or alternative measures of labor market underutilization. Modest amounts of underutilization among the part-time employed and a substantial degree of underutilization among those out of the labor force account for the disparity. The AHG also does well in accounting for wage movements over our sample period.     

Unemployment insurance: Risk sharing versus efficiency

Two models of spot labor markets are presented in which labor suppliers have heterogeneous attitudes towards effort and in which uncertainty prevails on labor productivity and growth. The problem of selecting efficient rules to manage unemployment insurance (UI) systems is considered. We show that there does not exist any system which combines an efficient allocation of labor with an efficient allocation of risks among employees, unemployed workers and capital-owners. Pareto-efficient policy rules are a best compromise between these two conflicting objectives. It implies that productive efficiency could be improved in periods of mass unemployment by reducing UI benefits. That would be at the expense of more inefficiencies in the sharing of macroeconomic risks. At the optimum, the UI benefit is positively correlated to growth and it is negatively correlated to labor productivity.     

Multivariate risk aversion and uninsurable risks: Theory and applications

The objective of this paper is to develop conditions for global multivariate comparative risk aversion in the presence of uninsurable, or background, risks, and thus generalize Kihlstrom and Mirman [1974] and Karni [1979,1989]. We analyze von Neumann-Morgenstern (VNM) utility functionsas well as smooth preference functionals which are nonlinear in distribution but locally linear in probabilities. In each case we provide an economic application which illustrates how our theorems can be used. We analyze a risk sharing, a portfolio choice, and a labor supply problem for VNM utility functions, and the optimal allocation of effort to risky technologies in the presence of a random supply (or quality) of a public good for nonlinear preference functionals. We consider thecase where the random variables are mean-independent as well as the case where they are independent. In the labor supply application for VNM utility functions, we show that if the two risks are independent, the comparative statics effect of greater risk aversion on labor supply in the presence of a background non-wage income risk is determined by a monotonic relationship between labor supply and the wage rate under certainty. That is, we extend the applicability of the Diamond-Stiglitz [1974]-Kihlstrom-Mirman [1974]single-crossing property to the case where an independent background risk is present.     

Inflation targeting and nominal-income-growth targeting: When and why are they suboptimal?

We compare optimal and simple interest-rate rules. Our model features optimizing agents, monopolistic competition in both product and labor markets, and one-period nominal contracts (for wages alone or for both wages and prices) signed before shocks are known. Exact solutions ensure that we obtain correct welfare rankings. Optimal rules maximize the unconditional expected utility of the representative agent with commitment subject to the information set of the policymaker. Even with monopolistic distortions, the optimal full-information rule makes the economy mimic the hypothetical full-flexibility equilibrium. Strict versions of inflation targeting, nominal-income-growth targeting, and other such simple rules are suboptimal under both full and partial information but flexible versions are optimal under certain partial-information assumptions. Nominal-income-growth targeting dominates inflation targeting for plausible parameter values.     

Incentives,wages, employment,and the division of labor in teams

We develop a theory of incentives, wages, and employment in the context of team production. A central insight is that specialization and division of labor not only improve productivity but also increase effort and the sensitivity of effort to incentives under moral hazard. We show that employment and incentives are complements for the principal when the positive effects of specialization and division of labor outweigh the increase in risk associated with additional employment and are substitutes otherwise. We provide new characterizations of the partnership, the firm, and the role of the budget‐breaker that are quite different from the classical literature.     

Labor supply and government programs: A cross-country analysis

There are substantial cross-country differences in labor supply late in the life cycle (age 50+). A theory of labor supply and retirement decisions is developed to quantitatively assess the role of social security, disability insurance, and taxation for understanding differences in labor supply late in the life cycle across European countries and the United States. The findings support the view that government policies can go a long way towards accounting for the low labor supply late in the life cycle in the European countries relative to the United States, with social security rules accounting for the bulk of these effects.     

News and Business Cycles in Open Economies

We study the effects of news about future total factor productivity (TFP) in a small open economy. We show that an open‐economy version of the neoclassical model produces a recession in response to good news about future TFP. We propose an open‐economy model that generates comovement in response to TFP news. The key elements of our model are a weak short‐run wealth effect on the labor supply and adjustment costs to labor and investment. We show that our model also generates comovement in response to news about future investment‐specific technical change and to “sudden stops.”     

Is Prescott right? Welfare state policies and the incentives to work, learn, and retire

This paper bolsters Prescott’s (Fed. Reserve Bank Minneap. Q. Rev. 28(1):2–13, 2004) claim that high taxes are responsible for lackluster labor market performance in Continental European countries. We develop a life-cycle model with endogenous skill formation, endogenous labor supply, and endogenous retirement. Labor taxation distorts not only labor supply, but also education and retirement decisions. Actuarially unfair pensions further exacerbate labor tax distortions on retirement. Education subsidies can nevertheless cushion the adverse impact of taxation on skill formation. Feedbacks between education, labor supply, and retirement are important. The model is simulated with realistic behavioral elasticities that are consistent with microeconometric evidence. If, besides labor supply, also learning and retirement are endogenous, the uncompensated (compensated) elasticity of the tax base equals 0.46 (0.85), which is more than twice as large as the standard uncompensated (compensated) labor supply elasticity of 0.18 (0.40). Furthermore, life-cycle interactions between education, working, and retirement are quantitatively important and the interactions raise all behavioral elasticities substantially. For example, the uncompensated labor supply elasticity increases with one-half due to life-cycle interactions (to 0.26). We demonstrate that low European labor supply can be fully explained by taxation without relying on unrealistically high labor supply elasticities. Reducing labor market distortions, cutting benefit levels, lowering tax rates, and making (early) retirement actuarially more fair, therefore, boosts labor supply, delays retirement, and stimulates skill formation. In addition, high education subsidies are needed in large welfare states to offset explicit and implicit tax burdens on human capital investment.      

Equilibrium implications of interest rate smoothing

We introduce a macro-finance model in which monetary authorities adjust the money supply by targeting not only output and inflation but also the slope of the yield curve. We study the impact of McCallum-type rules on capital growth, the volatility of interest rates, the spread between long- and short-term rates, and the persistence of monetary shocks. Our model supports the Federal Reserve's choice to incorporate financial data in their policy decisions and expand the monetary base to decrease the nominal interest rate spread at the cost of lower expected long-term growth.     

Fiscal Requirements for Dynamic and Real Determinacies in Economies with Private Provision of Liquidity: A Monetarist Assessment

We study the impact of fiscal policies on the inherent links between inflation, unemployment, and asset prices in an environment where firms provide liquidity and the central bank follows a constant money growth rate rule. Firms, other than hiring workers, also supply private assets that are not only useful as a store of value but also as collateral. When firms are not taxed and public debt is scarce, the economy is non-Ricardian so that real indeterminacies can be observed. Moreover, labor market characteristics do not affect the demand for government liabilities. However, when agents face public and private asset scarcity, labor market conditions then impact asset prices and inflation. We further show that irrespective of the type of asset scarcity agents face, when firms are taxed non-ad valorem, not only the level of tax revenues but also its composition matter for real allocations. Moreover, we show that labor market conditions directly affect the dynamics of all government liabilities and inflation.     

Comparing inequality aversion across countries when labor supply responses differ

We analyze to which extent social inequality aversion differs across nations when controlling for actual country differences in labor supply responses. Towards this aim, we estimate labor supply elasticities at both extensive and intensive margins for 17 EU countries and the US. Using the same data, inequality aversion is measured as the degree of redistribution implicit in current tax-benefit systems, when these systems are deemed optimal. We find relatively small differences in labor supply elasticities across countries. However, this changes the cross-country ranking in inequality aversion compared to scenarios following the standard approach of using uniform elasticities. Differences in redistributive views are significant between three groups of nations. Labor supply responses are systematically larger at the extensive margin and often larger for the lowest earnings groups, exacerbating the implicit Rawlsian views for countries with traditional social assistance programs. Given the possibility that labor supply responsiveness was underestimated at the time these programs were implemented, we show that such wrong perceptions would lead to less pronounced and much more similar levels of inequality aversion.     

Fiscal policy reforms and dynamic Laffer effects

This paper looks at the conditions under which a dynamic Laffer effect occurs. Using a basic model, we explain and reconcile selected findings in the literature. We numerically show that a lower tax rate on capital income is the best candidate for obtaining a dynamic Laffer effect—here defined as an improvement in the long-run budget balance of the government. Moreover, ignoring the stock of initial debt and changes in labor supply lead to an overestimation and underestimation of the effect, respectively. Finally, we show that when lower taxes on factor income are financed by higher taxes on consumption, there exists a wide array of combinations for which there is an improvement in both the long-run government budget balance and lifetime welfare. These combinations, however, differ in their implications for labor supply and immediate welfare effects.     

Public pensions and labor supply over the life cycle

In order to remain fiscally solvent, governments of many countries have reformed their public pension schemes to encourage labor supply at older ages. These reforms include reductions in the generosity of public pensions and reduced penalties for working past the normal retirement age. In this paper, we consider how reforms to public pension systems affect labor supply over the life cycle. We put the recent empirical evidence on the effect of government pensions on labor supply in a life cycle context, and we present evidence on the effectiveness of tax reforms for stimulating labor supply over the life cycle. Our main conclusion is that the labor supply of older workers is responsive to changes in retirement incentives. The labor supply of younger workers is less responsive. Thus the trend towards lower taxes on older workers in many developed countries should continue to fuel their trend towards later retirement.     

Maximum fee versus child benefit: a welfare analysis of Swedish child-care fee reform

The effects of a recent Swedish child-care fee reform are compared with those of an alternative reform, increased child benefits. The fee reform implied considerably decreased fees and was intended to increase both labor supply among parents and their economic well-being. We estimate labor supply effects using a discrete choice labor supply model, and simulate behavioral responses to the changes. We find positive, but small, effects on labor supply from reduced fees, while increased child benefits would make single mothers decrease their labor supply. On the other hand, increased child benefits would make income distribution more equal. We make a social welfare comparison and conclude that for plausible values of inequality aversion, the alternative reform would have been preferred to the implemented fee reform. The views expressed in the paper do not necessarily reflect those of the Swedish Ministry of Finance.     

How well-targeted are payroll tax cuts as a response to COVID-19? evidence from China

Numerous countries cut payroll taxes in response to COVID-19, including China, which reduced employer contributions by up to 21 percentage points. We use administrative data on more than 800,000 Chinese firms to evaluate payroll tax cuts as a business relief measure. We estimate that the tax cuts cover 31.5% of the decline in business cash flow, but labor informality causes 53% of registered firms-24% of aggregate economic activity-to receive no benefits at all. We quantify the targeting of the policy in terms of how much benefits flow to small firms less able to access external finance and to sectors worse hit by COVID-19. We find that (1) small firms and vulnerable industries are comparatively more labor intensive, which leads to desirable targeting; (2) labor informality worsens, but does not eliminate, targeting by firm size; and (3) labor informality is uncorrelated with the COVID-19 shock, and therefore does not affect targeting by sector.

     

Social welfare effects of tax-benefit reform under endogenous participation and unemployment: an ordinal approach

This paper analyzes the social welfare effects of tax-benefit reforms in a framework integrating endogenous labor supply and unemployment. We adopt an ordinal approach to social welfare comparisons by searching for “socially desirable” reforms that would improve social welfare for an entire class of social welfare functions. In the model, there is a discrete distribution of individuals’ productivities and individuals are heterogeneous with respect to leisure preferences (or disability of work). Labor supply decisions are limited to the participation decision. Unemployment is modeled in a search and matching framework with individual wage bargaining. For the social welfare analysis, the model is calibrated for Switzerland. Starting from a situation with an unemployment benefit scheme, the introduction of in-work benefits is shown to be a “socially desirable” reform: it would be unanimously preferred to the current situation according to all social welfare functions based on the criteria of Pareto, anonymity, and the principle of transfers. This result holds for two different types of preference heterogeneity (leisure preferences or disability of work) and also for the case where job search effort cannot be monitored.     

劳动力供给多维变化对制造业国际竞争力影响研究

依据1990-2014年劳动力供给数量、质量、成本及制造业国际竞争力相关数据,构建 VAR 模型,考量劳动力供给变化对中国制造业国际竞争力影响.结果表明:劳动力供给数量减少不利于制造业国际竞争力提升;劳动力供给质量上升有利于提高制造业国际竞争力,但其作用具有明显的滞后效应;劳动力成本上升有利于增强制造业国际竞争力,这与成本上升倒逼低端制造业转型升级等相关.鉴此,既要通过全面放开计生政策甚至鼓励生育以缓解劳动力供给数量快速下降对制造业国际竞争力带来的负向冲击;又要基于市场导向,培养产业所需的各层各类人才;同时合理运用劳动力成本上升的倒逼机制促进低端制造业转型升级,提高中国制造业国际竞争力.     

Inflation targeting makes the difference: Novel evidence on inflation stabilization

Though 28 and 29 provides theoretical evidence that the introduction of inflation targeting is consistent with an inflation stabilizing monetary policy, empirical evidence that the introduction of inflation targeting actually changes central bank’s behavior is still missing. This paper aims to close this gap and estimates forward-looking monetary policy rules for 20 inflation targeting countries. To this end, we use a data set which is available to the central bank in real-time, published on a frequently basis, comparable among all countries, and which includes the periods before and after the introduction of inflation targeting. We find that the introduction of inflation targeting significantly shifts the central bank’s reaction function toward inflation stabilizing. We also provide evidence of time-varying effects and find that central banks stabilize inflation once inflation targeting is introduced. We take our results as strong evidence that the introduction of inflation targeting makes the difference for monetary policy strategies.     

Targeted savings and labor supply

Substantial evidence suggests that savings behavior may depart from neoclassical optimization. This article examines the implications of raising the savings rate—whether through social security, retirement plans, or otherwise—for labor supply, where labor supply is determined by behavioral utility functions that reflect the non-neoclassical character of savings behavior. Under one formulation, raising the targeted savings rate increases labor supply regardless of the slope of the labor supply curve; under a second, raising the targeted savings rate has the same effect on labor supply as that of raising the labor income tax rate; and under a third, raising the targeted savings rate has no effect on labor supply. Effects on labor supply are particularly consequential because of the significant preexisting distortion due to labor income taxation.