THE WELFARE COSTS OF DEFICIT FINANCE

We analyze the welfare consequences of deficit finance in a general equilibrium model fit to the US. economy. Current spending may be financed with current and/or future distortionary taxes. The economy is open to international capital flows. The welfare costs of financing marginal current spending are substantial and are sensitive to the timing of the required taxes; postponing a tax on labor income is advantageous but postponing a tax on asset income is not. Ricardian equivalence poorly approximates the economy we consider.     

CAN THE HUMAN CAPITAL APPROACH EXPLAIN LIFE‐CYCLE WAGE DIFFERENTIALS BETWEEN RACES AND SEXES?

Using data from the National Longitudinal Survey of Youth–1979 cohort (NLSY79), this paper shows the importance of postschool human capital investment in describing both gender and racial wage gaps. The empirical results suggest that male-female wage gaps, regardless of race, are mainly caused by gender differences in the human capital production process; generally, men gain more work experience and therefore have lower marginal costs of human capital production. Black-white lifetime wage differentials could partly result from higher implicit interest rates for blacks, while the deterioration of black males' relative economic status as they age can be attributed to higher depreciation rates of their human capital stock. ( JEL J24, J30, C61)     

THE OPTIMAL TAXATION OF ASSET INCOME WHEN GOVERNMENT CONSUMPTION IS ENDOGENOUS: THEORY,ESTIMATION AND WELFARE

This paper derives the Ramsey optimal fiscal policy for taxing asset income in a model where government expenditure is a function of net output or the inputs that produce it. Extending work by Kenneth L. Judd, I demonstrate that the canonical result that the optimal tax on capital income is zero in the medium to long term is a special case of a more general model. Employing a vector error correction model to estimate the relationship between government consumption and net output or the factor inputs that generate it for the United States between 1948Q1 and 2015Q4, I demonstrate that this special case is empirically implausible, and show how a cointegrating vector can be used to determine the optimal tax schedule. I simulate a version of the model using the empirical estimates to measure the welfare implications of changing the tax rate on asset income, and contrast these results with those generated in a version of the model where government consumption is purely exogenous. The shifting pattern of welfare measurements confirms the theoretical results. I calculate that the prevailing effective tax rate on net asset income in the United States between 1970 and 2014 averaged 0.449. Hence abolishing the tax completely does generate welfare improvements, though only by the equivalent of between 1.103% and 1.616% permanent increase in consumption—well under half the implied welfare benefit when the endogeneity of the government consumption is ignored. The maximum welfare improvement from shifting part of the burden of tax from capital to labor is the equivalent of a permanent increase in consumption of between only 1.491% and 1.858%, and is attained when the tax rate on asset income is lowered to between 0.148 and 0.186. Allowing the tax rate to vary over time raises the maximum welfare benefit to 1.865%. All the results are very robust to a wide range of elasticities of labor supply. (JEL E62, H21, H50)     

EFFICIENCY WAGES AND SUBJECTIVE PERFORMANCE PAY

This paper studies optimal relational contracts in motivating workers in a market setting. We find that labor markets with higher turnover costs will use more subjective performance pay and less efficiency wages and that in those markets, the total wage payment is lower and the equilibrium employment level is higher. Surprisingly, under certain conditions, an increase in turnover costs leads to higher social welfare. Incorporating workers' search costs, we show that wages are procyclical in booms and are either rigid or countercyclical during recessions. The predictions of the model are consistent with some empirical evidence. ( JEL D82, J33, J41, J63)     

WELFARE IMPACT OF A BAN ON CHILD LABOR

This article presents a new rationale for imposing restrictions on child labor. In a standard overlapping generation model where parental altruism results in transfers that children allocate to consumption and education, the Nash‐Cournot equilibrium results in suboptimal levels of parental transfers and does not maximize the average level of utility of currently living agents. A ban on child labor decreases children's income and generates an increase in parental transfers bringing their levels closer to the optimum, raising children's welfare as well as average welfare in the short run and in the long run. Moreover, the inability to work allows children to allocate more time to education, and it leads to an increase in human capital. Besides, to increase transfers, parents decrease savings and hence physical capital accumulation. When prices are flexible, these effects diminish the positive welfare impact of the ban on child labor. (JEL D91, E21)     

POLICY VARIATION,LABOR SUPPLY ELASTICITIES,AND A STRUCTURAL MODEL OF RETIREMENT

This paper exploits a combination of policy variation from multiple pension reforms in Austria and administrative data from the Austrian Social Security Database. Using the policy changes for identification, we estimate social security wealth and accrual elasticities in individuals' retirement decisions. Next, we use these elasticities to estimate a dynamic programming model of retirement decisions. Finally, we use the estimated model to examine the labor supply and welfare consequences of potential social security reforms. (JEL J26, H55)     

HEALTH, EDUCATION, AND LIFE CYCLE SAVINGS IN THE DEVELOPMENT PROCESS

This paper studies investment in health and human capital in a life cycle model. Health investment enhances survival to old age by improving health from its endowed level. The model predicts two distinctive phases of development. When income is low enough, the economy has no health investment and little savings, leading to slow growth. When income grows, health investment will become positive and the saving rate will rise, leading to higher life expectancy and faster growth. A health subsidy can move the economy from the first phase to the next. Subsidies on health and human capital investments can improve welfare. ( JEL I00, J10, H50, O10)     

LABOR CONTRACTS AND FLEXIBILITY: EVIDENCE FROM A LABOR MARKET REFORM IN SPAIN

This paper evaluates the effects of a labor market reform in Spain that removed restrictions on fixed‐term or temporary contracts. Our empirical results are based on longitudinal firm‐level data that cover observations before and after the reform. We posit and estimate a dynamic labor demand model with indefinite and fixed‐term labor contracts, and a general structure of labor adjustment costs. Experiments using the estimated model show important positive effects of the reform on total employment (i.e., a 3.5% increase) and job turnover. There is a strong substitution of permanent by temporary workers (i.e., a 10% decline in permanent employment). The effects on labor productivity and the value of firms are very small. In contrast, a counterfactual reform that halved all firing costs would produce the same employment increase as the actual reform, but much larger improvements in productivity and in the value of firms. (JEL J23, J32, J41)     

Family and neighborhood welfare dependency and sons' labor supply

This article tests four models of how parental and childhood welfare use affects sons' labor supply: the correlated disadvantages model, Wilson's structural-environmental model, Mead's welfare culture model, and Murray's incentives model. Past research is extended by including measures of all seven factors that these models predict will shape sons' labor supply: parental welfare use, neighborhood welfare use, parental income, family noneconomic resources, neighborhood resources, labor market conditions, and state welfare benefits. There are four main findings. First, welfare use in the childhood neighborhood has no effects on sons' work hours. Second, only one group of sons is affected by parental welfare use: black sons' whose parents average $7,500 or more in welfare income per year. Third, black sons' adult work hours are strongly predicted by parental poverty and by labor market conditions; together these account for half the estimated relationships between heavy parental welfare use and black sons' labor supply. Fourth, parents' and neighbors' work hours strongly predict nonblack sons' labor supply. This research was supported by Assistant Secretary for Planning and Evaluation, Department of Health and Human Services, by the Rockefeller Foundation, and by the Office of the Vice-President for Research at the University of Michigan. We are grateful to John Bound, Sheldon Danziger, Greg Duncan, Martha Hill, and an anoymous reviewer for helpful comments and advice, to Marguerite Grabarek and James Kunz for programming, and most of all to Wendy Niemi for her patient, accurate, and efficient typing. Her research interests include poverty, social stratification, and labor economics. His research interests include rural poverty, poverty neighborhoods, and intergenerational poverty.     

PARENTAL ALTRUISM AND SELF-INTEREST: CHILD LABOR AMONG LATE NINETEENTH-CENTURY AMERICAN FAMILIES

Intergenerational relationships within late nineteenth-century industrial families are analyzed using several large-scale, contemporary household surveys. Nonaltruistic behavior by parents was pervasive. Even among families with positive assets, child labor was common in certain industrial settings, suggesting that child labor (or nonschooling) did not simply reflect parental borrowing constraints. Neither did physical asset transfers offset human capital losses among working youth. A quantitative estimate of parental nonaltruism is derived from an equilibrium labor market model: approximately 90 percent of all child earnings was implicitly competed away through lower adult wages as families migrated to areas with abundant child labor opportunities.     

DOES ECONOMIC FREEDOM AFFECT THE PRODUCTION FRONTIER? A SEMIPARAMETRIC APPROACH WITH PANEL DATA

This paper applies a multistep semiparametric stochastic production frontier estimator to investigate the effects of economic freedom (EF) on the production frontier and technical efficiency. We allow output elasticities and technical efficiency to depend on EF, estimate a smooth coefficient stochastic production frontier, and compare with parametric alternatives. Our results highlight the flexibility of semiparametric approaches as we find parametric approaches are too restrictive in estimating marginal productivity. Output elasticities of labor, human capital, and physical capital vary with the level of EF and our average efficiency estimates are at least 20% higher than those obtained from parametric counterparts. (JEL C14, O43)     

CHILD LABOR AND SCHOOLING RESPONSES TO ACCESS TO MICROCREDIT IN RURAL BANGLADESH

Microcredit has been shown to be effective in reducing poverty in many developing countries. However, less is known about its effect on human capital formation. In this article, we examine the impact of access to microcredit on children's education and child labor using a new and large data set from rural Bangladesh. The results show that household participation in a microcredit program may increase child labor and reduce school enrollment. The adverse effects are more pronounced for girls than boys. Younger children are more adversely affected than their older siblings and the children of poorer and less educated households are affected most adversely. Our findings remain robust to different specifications and methods, and when corrected for various sources of selection bias. (JEL H43, I21, J13, J24, L30, O12)     

WHY DOES CHILD LABOR PERSIST WITH DECLINING POVERTY?

We develop a dynamic overlapping generations model to highlight the role of income inequality in explaining the persistence of child labor under declining poverty. Differential investment in two forms of human capital—schooling and health—in the presence of inequality gives rise to a nonconvergent income distribution in the steady state characterized by multiple steady states of relative income with varying levels of education, health, and child labor. The child labor trap thus generated is shown to preserve itself despite rising per capita income. Policy recommendations include public provision of education targeted toward reducing schooling costs for the poor or raising the efficacy of public health infrastructure. (JEL I1, J2, O1, O2)     

Geographical differentials in the socioeconomic status of Puerto Ricans: human capital variations and labor market characteristics

"This article examines the role of human capital and labor market characteristics in explaining geographical and individual differentials in socioeconomic outcomes of Puerto Rican women [in the United States]. The better socioeconomic performance of Puerto Ricans outside the Northeast can be in part related to their larger amount of human capital. Labor market characteristics also play a role, but their effects are generally small. Net of other characteristics, Northeast residence reduces labor force participation, increases female headship, but reduces welfare use. Of all groups examined, recent migrants from Puerto Rico located in the Northeast show the poorest socioeconomic outcomes."     

THE ENTREPRENEUR'S REWARD FOR SELF-POLICING

The collaboration among people is often subject to shirking; the net gain from the collaboration depends on the contract governing it. I argue that the entrepreneur assumes the role of the residual claimant because his actions are more costly to monitor than those of the factors with which he collaborates. By offering fixed pay contracts to others and himself becoming residual claimant, the entrepreneur curtails his incentive to gain at the expense of his partners, and the net gain from the collaboration is then maximized. Costly monitoring applies to both labor and capital, and thus the entrepreneur may supply both labor services and capital. The entrepreneur's capital serves to guarantee the pay of the other factors.     

Tax–benefit revealed social preferences

This paper inverts the usual logic of applied optimal income taxation. It starts from the observed distribution of income before and after redistribution and corresponding marginal tax rates. Under a set of simplifying assumptions, it is then possible to recover the social welfare function that would make the observed marginal tax rate schedule optimal. In this framework, the issue of the optimality of an existing tax–benefit system is transformed into the issue of the shape of the social welfare function associated with that system and whether it satisfies elementary properties. This method is applied to the French redistribution system with the interesting implication that the French redistribution authority may appear, under some plausible scenario concerning the size of the labor supply behavioral reactions, non Paretian (e.g. giving negative marginal social weights to the richest class of tax payers).     

Allocational and distributional aspects of future immigration to Western Europe

"This article shows that an analysis of the impacts of immigration [in Western Europe] has to be divided into allocational and distributional aspects. From an allocational point of view, like free trade in goods, services and capital, migration is welfare-improving as long as marginal productivities of labor are not equalized worldwide. From a distributional point of view, however, the immigration society has to bear the effects of sharing its common public goods and its social values with the new immigrants. Free immigration will only be allowed if the allocational welfare gains exceed the distributional welfare losses. According to this rule of thumb, a guideline for an efficient migration policy is sketched."     

HOW DOES GLOBALIZATION AFFECT THE IMPLICIT TAX RATES ON LABOR INCOME,CAPITAL INCOME,AND CONSUMPTION IN THE EUROPEAN UNION?

This article analyzes the effects of globalization on implicit tax rates (ITRs) on labor income, capital income, and consumption in the EU15 and Central and Eastern European New Member States (CEE NMS). We find supportive evidence for an increase in the ITR on labor income in the EU15, but no effect on the ITR on capital income. There is evidence of convergence in terms of the ITR on consumption, as countries with higher than average ITR on consumption respond to globalization by decreasing their tax rates. There are important differences among the welfare regimes within the EU15. Social‐democratic countries have decreased the tax burden on capital, but increased that on labor due to globalization. Globalization exerts a pressure to increase taxes on labor income in the conservative and liberal regimes as well. Taxes on consumption decrease in response to globalization in the conservative and social‐democratic regimes. In the CEE NMS, there is no effect of globalization on the ITR on labor and capital income, but we find a negative impact on the ITR on consumption in the CEE NMS with higher than average ITR on consumption. (JEL H23, H24, H25, F19, F21)     

The role and significance of endogenous firing costs in a matching model with endogenous job destruction

Traditional models of the labor market assume fixed firing costs. This paper explores the implications of variable firing costs, building this new assumption into a matching model with endogenous job destruction. The available evidence on the outcomes of cases brought to labor courts suggests that firing costs are negatively related with labor market tightness. In such a case, we may no longer invoke “rigidities” on labor markets as the cause of their poor performance. Our model yields three interesting results. First, labor markets may have multiple equilibria that cannot be Pareto-ordered; each with its own configuration in terms of average duration of unemployment and filled jobs, as well as employment protection. Second, the variability of firing costs produces a positive externality affecting the stability properties of these equilibria. Finally, the two externalities affect the efficiency of the social optimum, modifying the Hosios [Hosios, A.J., 1990. On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57, 279–298] condition. We use these results to interpret the recent history of European unemployment.     

THE EFFECTS OF JOB RELOCATION ON SPOUSAL CAREERS: EVIDENCE FROM MILITARY CHANGE OF STATION MOVES

We investigate the impact of military job relocation on spousal earnings and employment by creating a unique longitudinal database that tracks over 900,000 military spouses over the period 2001–2012, based on data from two administrative sources—military records on personnel and their dependents, and Social Security earnings records. This database allows us to estimate the effects of military change of station moves controlling for some key observable characteristics of the service‐member and household and controlling for individual spouse fixed effects. We find that military moves cause a substantial decline in spousal earnings in the year of the move, on the order of $2,100, or 14% of average spousal earnings. Moves also increase the likelihood that the spouse has no earnings for the year. We find larger earnings reductions for moves that cross state lines, and for older spouses, male spouses, and those with young children. The career costs persist over time and spouses continue to experience significantly lower earnings 2 years after the move. This persistence, combined with the typical military member experiencing a change of station move every 2 or 3 years, may substantially limit the ability of military spouses to accumulate human capital over time. (JEL H56, R23, J45, J16, J64)