This paper studies the interaction between fiscal commitment and sovereign default risk in a model with optimal taxation and government spending. A time-inconsistency problem arises in our framework as the government cannot credibly commit to its future tax policies. As a result, it chooses suboptimally low fiscal adjustments and defaults too frequently. Introducing a commitment device to future tax policies can mitigate this time-inconsistency problem and improve the government's borrowing opportunities. However, such a commitment device also entails a loss of tax contingency that might be costly. Our quantitative analysis shows that committing to an inflexible tax plan is counterproductive: the lack of contingency hurts the government's debt sustainability and reduces welfare. In contrast, committing to a flexible tax plan that is contingent on future economic conditions can improve debt sustainability by 53.3% and result in a significant welfare gain.
We study the aggregate consequences of the Social Security Disability Insurance (DI) program, focusing on the role of complementarity between heterogeneous human capital. First, we develop and estimate a wage process in which individuals' human capital comprises (pure) labor and experience, and their efficiencies are affected by disability. We find that older workers are more experience-abundant, and that disability causes a smaller loss in the efficiency of experience than it does in the efficiency of labor. Further, the estimated aggregate production technology shows that labor and experience are complementary inputs. Combining these empirical results with a structural general equilibrium model, we analyze the labor market implications of removing the DI program. Removal of the DI program induces an increase in the relative supply of experience, thus affecting the marginal productivities of inputs and wages of all workers in the economy. Despite the increased labor market entry of disabled workers, the aggregate productivity may increase in the counterfactual economy, thanks to the complementarity between labor and experience.
This paper studies the impact of a minimum wage policy in a labor market with a private and a public sector. We develop a two-sector search and matching model with minimum wage and heterogeneous workers in their human capital. We structurally estimate the model using data for Chile, a country with a large fraction of employment in the public sector and a binding minimum wage. Counterfactual analysis shows that institutional features of public sector employment reduce labor market frictions and mitigate the negative effect of the minimum wage on unemployment and welfare.
Eligibility and benefits for anti-poverty income transfers in the U.S. are based on both the means and the household characteristics of applicants, such as their filing status, living arrangement, and marital status. In this paper we develop a dynamic structural model to study the effects of the U.S. tax-transfer system on the decisions of non-college-educated workers with children. In our model workers face uninsurable idiosyncratic risks and make decisions on savings, labor supply, living arrangement, and marital status. We find that the U.S. anti-poverty policy distorts the cohabitation/marriage decision of single mothers, providing incentives to cohabit. We also find quantitatively important effects on savings, and on the labor supply of husbands and wives. Namely, the model yields a U-shaped relationship between the earnings of one spouse and the labor supply of the other spouse, a result that we also find in the data. We show that these U-shaped relationships stem in part from the current design of anti-poverty income programs, and that the introduction of an EITC deduction on the earnings of secondary earners—as proposed in the 21st Century Worker Tax Cut Act—would increase the employment rate of the spouses of workers earning between $15K and $35K, especially of female spouses.
We provide an estimated DSGE model of a small open economy with both domestic and international financial market frictions. Firms face credit constraints and trade an intrinsically useless asset. Low foreign interest rates are conducive to bubble formation. An asset bubble provides liquidity and relaxes credit constraints. It provides a powerful amplification and propagation mechanism. Our estimated model based on Bayesian methods explains the high volatilities of consumption and stock prices relative to output, countercyclical trade balance, and procyclical stock prices observed in the Mexican data over the period 1990Q1-2011Q4.
Based on administrative data from Statistics Norway, we find economically significant shifts in households’ financial portfolios around individual structural breaks in labor-income volatility. According to our estimates, when income risk doubles, households reduce their risky share of financial assets by 5 percentage points, thus tempering their overall risk exposure. We show that our estimated risky share response is consistent with a standard portfolio choice model augmented with idiosyncratic, time-varying income volatility.
Do differences exist between firms created by unemployed individuals relative to those created by otherwise identical employed individuals? I develop a general equilibrium model of entrepreneurship with endogenous entry and exit that allows for different choices of business projects by unemployed and employed individuals. The model predicts that (1) different outside options imply that the unemployed are more likely to start firms, but these are smaller and they fail more often and (2) employed individuals are more responsive to wages than the unemployed in their decision to start a firm. I verify these implications using a new administrative Canadian matched owner-employer-employee dataset. I use firm closures to identify random assignments of individuals to unemployment. Finally, using a quantitative version of the model, I show that subsidizing entrepreneurship among the unemployed has little impact on job creation and induces a reallocation of resources to low productivity firms.
We show that the large elasticity of substitution between capital and labor estimated in the literature on average, 0.9, can be explained by three issues: publication bias, use of cross-country variation, and omission of the first-order condition for capital. The mean elasticity conditional on the absence of these issues is 0.3. To obtain this result, we collect 3,186 estimates of the elasticity reported in 121 studies, codify 71 variables that reflect the context in which researchers produce their estimates, and address model uncertainty by Bayesian and frequentist model averaging. We employ nonlinear techniques to correct for publication bias, which is responsible for at least half of the overall reduction in the mean elasticity from 0.9 to 0.3. Our findings also suggest that a failure to normalize the production function leads to a substantial upward bias in the estimated elasticity. The weight of evidence accumulated in the empirical literature emphatically rejects the Cobb-Douglas specification.
High hours worked and higher returns to longer hours worked are common in many occupations, namely nonlinear occupations (Goldin 2014). Over the last four decades, both the share and relative wage premium of nonlinear occupations have been rising. Females have been facing rising experience premiums especially in nonlinear occupations. To quantitatively explore how these changes affected female labor supply over time, we build a quantitative, dynamic general equilibrium model of occupational choice and labor supply at both extensive and intensive margins. A decomposition analysis finds that the rising returns to experience, especially in nonlinear occupations, and technical change biased towards nonlinear occupations are important to explain the intensive margin of female labor supply that keeps rising even in the recent period during which female employment stagnates. Finally, a counterfactual experiment suggests that if the nonlinearities were to be gradually vanishing, female employment could have been higher at the expense of significantly lower intensive margin labor supply.
This paper takes a novel time series perspective on the financing of K-12 schooling. About half of school spending is financed by state government aid to local districts, and because state aid is generally income conditioned, it acts as a mechanism for risk sharing between school districts. We show that temporal inequality, due to state and local business cycles, is prevalent across the income distribution. We estimate a model of local revenue and state aid, and its allocation across districts, and use the parameters to simulate impulse response functions. We find that state aid provides risk sharing for local shocks, although slow speed of adjustment results in temporal inequality. There is little risk sharing for statewide income shocks, and the risk from such shocks to school spending is more severe in low-income districts because of their greater reliance on state aid.
