Working Paper: CEPR ID: DP17848
Authors: Youngsoo Jang; Takeki Sunakawa; Minchul Yum
Abstract: This paper studies how transfer progressivity influences aggregate fluctuations when interacting with household heterogeneity. Using a simple static model of the extensive margin labor supply, we analytically characterize how transfer progressivity influences differential labor supply responses to aggregate conditions across heterogeneous households. We then build a quantitative dynamic general equilibrium model with both idiosyncratic and aggregate productivity shocks and show that it delivers moderately procyclical average labor productivity and a large cyclical volatility of aggregate hours relative to output. A counterfactual exercise shows that higher progressivity achieved by a faster phase-out of transfers would strengthen our mechanism. Finally, we provide suggestive empirical evidence on the heterogeneity of employment responses across the wage distribution.
Keywords: Progressivity; Targeted Transfers; Business Cycles; Redistributive Policies
JEL Codes: E32; E24; H31; H53; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| transfer progressivity (H87) | labor supply response of low-type households (J22) |
| transfer progressivity (H87) | cyclicality of average labor productivity (E23) |
| labor supply response of low-type households (J22) | cyclicality of average labor productivity (E23) |
| transfer progressivity (H87) | volatility of hours worked (J22) |
| transfer progressivity (H87) | employment changes among different wage groups (J31) |