Married women's labor supply and economic development: Evidence from Sri Lankan household data

Women's labor supply in Sri Lanka has increased steadily since the early 1990s following economic reforms, but remains well below the level predicted by national income, a feature shared by a number of Asian and Latin American countries that have undergone similar reforms and economic growth. To understand the microeconomic determinants of women's work in Sri Lanka's growing economy, this paper estimates a binary‐choice model of married women's labor supply using household survey data spanning a 23‐year period. Decomposition and cohort analysis reveal that women have been drawn into the workforce through falling fertility rates, rising tertiary education, and declining income effects among younger generations, but other factors have undermined this positive trend. Educational attainment reduces married women's labor supply except at the tertiary level, consistent with social stigmas associated with married women in non‐white‐collar employment. The strict sectoral segregation of married women by education level supports this hypothesis. In addition, growth has been concentrated in low‐skilled sectors with self‐employment more prevalent, reducing employment prospects of educated women and prompting their labor force withdrawal. This suggests it is the structure of economic development, rather than speed, that matters for women's labor force activity.     

Origins and developments of Irving Fisher's compensated dollar plan

This paper compares two articles by Lionel Robbins () and by Dennis H. Robertson () on the topic of labour supply. Robertson's article is shown to anticipate the main results of Robbins's seminal article. Yet, Robertson covers a number of other issues (e.g. constraints on hours worked and the impact of non-pecuniary factors) that are neglected by Robbins. Robertson's article is used to illustrate important gaps and omissions in the economics literature on labour supply that have occurred through the acceptance of some of the arguments contained in Robbins's article.     

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.     

Economic decision-making by cohabitors: findings regarding income pooling

Cohabitation rates are increasing in the US but little is known about how cohabitors make economic decisions. For instance, do female cohabitors treat their male partner's income as shared household income when choosing hours worked? Does income sharing differ among types of cohabitors? This study investigates whether or not cohabitors pool income by drawing inferences from a generalized model of labour supply. The empirical work uses data from the 1993 Current Population Survey and the 1987 National Survey of Families and Households. These data sets provide evidence that cohabitors, taken as a group, do not pool all income. However, there is also evidence that cohabitors are not homogeneous in their behaviour; income pooling is not rejected for cohabitors in longer-term relationships and for those who have a biological child together.     

WEARING OUT YOUR WELCOME: EXAMINING DIFFERENTIAL MEDICAID ELIGIBILITY OF NEW ENTRANTS AND CONTINUING RECIPIENTS

Until recently, states were permitted to have different “new entrant” and “continuing recipient” income limits for parental Medicaid eligibility by implementing income disregards that changed with spell length. Some states utilized this option—either tightening income limits for the same family over time or loosening them. In this article, we construct a theoretical model of utility‐maximizing workers facing different time‐dependent eligibility thresholds to predict the Medicaid participation and employment behavior of workers with varying wage levels. The model reveals some inter‐temporally perverse incentives created by linking eligibility thresholds to Medicaid duration. Then, we empirically test these predictions using the Survey of Income and Program Participation and a unique compilation of state‐by‐family size Medicaid thresholds for both new and continuing recipients. We find that patterns of Medicaid participation and spell duration are consistent with the predictions of our model. There is also evidence that the individuals predicted by our model to lower their work hours may supply fewer hours of labor. As of January 2014, the Affordable Care Act disallows time‐varying income disregards; our findings suggest that states previously using this strategy will experience an adjustment in Medicaid caseloads and possibly labor market outcomes because of the change. (JEL H4, I1, J2)     

Is ex‐ante ex‐post analysis irrelevant to Keynes's theory of employment?

Ex‐ante ex‐post analysis has become a standard tool in macroeconomics. Yet Keynes dismissed it. We argue that Keynes's dismissal of ex‐ante ex‐post analysis is not an oddity but an indication of the originality of his theory of employment compared to standard macroeconomics. First, the principle of effective demand does not amount to a process that determines employment and income at the point of intersection of the traditionally defined ex ante supply and demand functions. Second, the finance motive allowed Keynes to confirm the identity of aggregate supply and demand already asserted in The General Theory. This latter conclusion is puzzling, however, since the principle of effective demand presupposes the possibility of a discrepancy between supply and demand. We suggest that Keynes's theory of employment is linked to a theory of income distribution whereby profits are a redistributed share of factor income which is transferred to firms when prices exceed factor costs. The identity and the equilibrium condition then relate to separate measurements of income and output, factor cost and prices.     

IMPROVING EQUALITY OF OPPORTUNITY: NEW INSIGHTS FROM BIG DATA

Children's chances of earning more than their parents have fallen from 90% to 50% over the past half century in America. How can we restore the American Dream of upward mobility for our children? In this talk, Raj Chetty discusses recent work that he and his colleagues at Opportunity Insights have done addressing this question. Among other topics, Professor Chetty covers how and why children's chances of climbing the income ladder vary across neighborhoods, how race still matters for economic mobility in the U.S. today, and the relationship between equality of opportunity, innovation, and growth. (JEL I3, H4, D9)     

Political stability,corruption and trust in politicians

In this article we develop a dynamic model where an endogenous evolution of trust impacts a politician's choice for bribe-taking and tax re-distribution. The politician obtains utility from net income that comes from his wage income, tax embezzlements and bribe-taking, and he also has incentives for tax re-distribution. The higher the tax embezzlements and the more bribes the politician takes the lower his citizens' trust and the less likely will he be re-elected. We support the evolution of trust with an econometric investigation.We analyze the necessary and sufficient conditions, and find that withholding taxes and taking bribes may be complements or substitutes for a politician, depending on the politician's incentives for tax re-distribution. Without these incentives, tax embezzlement and bribe taking are necessarily substitutes. With sufficiently strong incentives, we find re-distribution and bribe-taking may become complements. Complements implies that the politician, at least partly, increases bribe-taking because this allows him to increase re-distribution, which aids his additional motives for tax re-distribution.Based on comparative statics at steady state we also find that the higher the politician's wage the lower the bribe-taking and the higher the trust; stronger social capital leads to less bribe-taking and higher levels of trust; improvements in electoral accountability induce a decrease in bribing while trust increases.     

Public Provision of Private Goods,Self‐Selection,and Income Tax Avoidance

Redistributive taxation should benefit those with low earnings capacity rather than those who choose a lower income to obtain tax savings. Several contributions have highlighted how public provision of work complements can discourage people from lowering labor supply to diminish taxable income. We show how tax avoidance, previously neglected, can alter the conclusions regarding public provision. Tax avoidance breaks the link between labor supply and reported income. An agent reducing his reported income to escape taxes might no longer forego a publicly provided labor complement, because he can now lower his income by avoiding more rather than working less.     

Recent developments in China's labor market: Labor shortage,rising wages and their implications

China's abundant supply of cheap labor has played an important role in its remarkable economic and social development. Recently, however, China has experienced a labor shortage and rising wages, implying that the country's long‐lasting competitive advantage based on its “unlimited” labor supply and low costs is vanishing. We find that structural demographic changes, regional economic growth disparities and the household registration system may have caused the labor shortage. Furthermore, China's continued low wages, relatively low labor share of gross national income, declining proportion of household consumption to GDP , and productivity improvements as well as increasing unit labor costs can be used to explain the recent wage increases. The dramatic development of its labor market signals that China is entering a new stage of economic development. The country's prior successful model of economic development needs to be adjusted to adapt to the new situation in its labor market to achieve sustainable economic development.     

The political economy of tariff protection in China: evidence from the WTO accession

We analyze China's tariff rates at WTO accession using a political economy approach. A model drawing on Branstetter and Feenstra ( 2002 ) is used to derive an optimal tariff rate for each industry. The model predicts that a government would set a high tariff rate if an industry is of large state‐owned enterprise (SOE) share, multinational share, or small foreign import share. From the model we reveal the Chinese government's preference towards different interest groups under the binding tariff constraint from the WTO commitments. The estimated structural parameters imply that the political weights on both the SOE profits and consumer income diminish with the economic opening. More important, the government still favours SOEs over consumer income. Our findings are consistent with the special features of China's economy.     

Longevity,Fertility and Economic Growth: Do Environmental Factors Matter?

Our study examines the effect of environmental factors on the economic decisions regarding fertility. We incorporate health‐damaging pollution into a three period overlapping generations model in which life expectancy, fertility and economic growth are all endogenous. We show that environmental factors can cause significant changes to the economy's demographics. In particular, the entrepreneurial choice of less polluting production processes, induced by a tax on emissions, can at some point in time lead to such changes as higher longevity and lower fertility rates. Thus, we provide a novel explanation on the positive relation between fertility rates and pollution. According to this, the causality on this relation may also work from the latter to the former. Furthermore, our model can account for the empirically observed N‐shaped correlation between pollution and income per capita.     

Dutertenomics: Populism,Progress, and Prospects

In 2016, when Rodrigo Duterte was elected Philippine President the economy was growing robustly. Despite the record growth, his election is considered a populist revolt of the middle‐ and upper‐class Filipinos. Yet, his economic policies – from his initial 10‐point agenda to the laws he approved – are liberal. This paper distinguishes and relates Duterte's authoritarian‐populist political style (“Dutertismo”) and his economic agenda (“Dutertenomics”). The distinction follows from his lack of interest in economic affairs, which he delegated to his team of economic managers. This team ably pushes important economic reforms because of the president's style, which so far has earned him wide public approval. After slowing down during the first half of Duterte's term, growth has recently picked up. To keep the momentum and public attention off human rights violations, Duterte needs to accomplish his economic agenda by mid‐2022. Drawing on his powers and popularity, he may yet be able to elicit the full support of Congress.     

Shifting Taxes from Labor to Consumption: More Employment and more Inequality?

This paper investigates the effect of shifting taxes from labor income to consumption on labor supply and the distribution of income in Germany. We simulate stepwise increases in the value‐added tax (VAT) rate, which are compensated by revenue‐neutral reductions in income‐related taxes. We differentiate between the personal income tax (PIT) and social security contributions (SSC). Based on a dual data base and a microsimulation model of household labor supply behavior, we find a regressive impact of such a tax shift in the short run. When accounting for labor supply adjustments, the adverse distributional impact persists for PIT reductions, while the overall effects on inequality and progressivity become lower when payroll taxes are reduced. This is partly due to increases in aggregate labor supply, resulting from higher work incentives.     

Towards a More Complete Efficiency Wage Theory

The efficiency wage is an important topic in the theory of employment. In a traditional efficiency wage model, only the representative firm is optimizing against an assumed S‐shaped effort supply function. This S‐shaped supply curve is critical for the model and the absence of a derivation of the curve in the literature means that it is an incomplete theory. In the present paper, we extend the model by specifying a worker's representative utility function so that the corresponding argmax function will be the S‐shaped effort supply curve. This will make the worker's decision process endogenous and will produce a more complete model. The importance of this extension is clear. The characterization of the utility function will make explicit the necessary conditions and crucial assumptions of the traditional model. More importantly, the extension will allow researchers to introduce employment compensation factors into the worker's utility function for analysis. This has important bearings on future development in employment theory. For example, a worker's satisfaction from shirking (net of dismissal risks), or his or her willingness to search for jobs (net of search cost), can now be included in his or her utility function to form an optimal work or search strategy. Incorporating the worker's optimization behaviour into the model will also enable researchers to study policy directed not just towards firms but also towards the worker's decision process. Furthermore, this approach provides a framework for researchers to generate comparative statics. These comparative statics can lead to interesting topics for econometric models or to further research within this field.     

Exports,Supply Constraints and Growth: An Investigation using Regional Data

In this work we first model the role of demand‐ and supply‐side factors (labour market adjustment, productive efficiency) in explaining economic growth. Empirically testing the model, we evaluate why different growth regimes may appear in the 20 Italian administrative regions. This exercise uses a two‐stage econometric approach. Estimates for the elasticity of manufacturing output to exports are obtained from regional time series: a significant long‐run relationship indicates the existence of a demand‐constrained growth regime. We then ascertain whether the regional dispersion of supply‐side factors has an impact on the regional dispersion of growth regimes. The empirical evidence supports our expectations of strong regional differences. Southern regions are less likely to display demand‐constrained regimes. In explanation of these differences, second‐stage analysis reveals that a strong role is played by such efficiency‐enhancing factors as technological innovation, bank diffusion and ‘social capital’. No role is found for labour market rigidities.     

Median‐voter Equilibria in the Neoclassical Growth Model under Aggregation*

We study a dynamic version of Meltzer and Richard's median‐voter model where agents differ in wealth. Taxes are proportional to income and are redistributed as equal lump‐sum transfers. Voting occurs every period and each consumer votes for the tax that maximizes his welfare. We characterize time‐consistent Markov‐perfect equilibria twofold. First, restricting utility classes, we show that the economy's aggregate state is mean and median wealth. Second, we derive the median‐voter's first‐order condition interpreting it as a tradeoff between distortions and net wealth transfers. Our method for solving the steady state relies on a polynomial expansion around the steady state.     

Oil booms and inequality in Iran

We study the response of income inequality to positive per capita oil and gas revenue shocks in Iran. Using historical data from 1973 to 2016 and vector autoregression (VAR) as well as vector error correction (VECM) model‐based impulse‐response functions, we find a positive and statistically significant response of income inequality to oil booms. We also explore possible channels through which oil booms may increase inequality, including private sector credit growth, construction investment, international trade (imports) and real economic output. We find that following an oil boom, higher imports, private sector credit growth, and real economic output can explain the increased income gap to a certain degree in Iran's oil‐based economy. Our analysis can help policymakers evaluate and accommodate the possible positive or negative effects of inequality in Iran resulting from the 2016 lifting of the embargo against the country.     

RECURSIVE EQUILIBRIA IN AN AIYAGARI‐STYLE ECONOMY WITH PERMANENT INCOME SHOCKS

We prove existence of a recursive competitive equilibrium (RCE) for an Aiyagari‐style economy with permanent income shocks and derive important economic implications. We show that there exist equilibria where borrowing constraints are never binding and establish a nontrivial lower bound on the equilibrium interest rate. These results imply distinct consumption dynamics compared to existing studies. We present a new approach to solve the agent's problem that uses lattices of consumption functions to deal with permanent income shocks and an unbounded utility function. The approach provides a theoretical foundation for convergence of the time iteration algorithm widely used in applied work.