Was the Great Depression a Low-Level Equilibrium?

Was the Great Depression the outcome of a massive coordination failure? Or was it a unique equilibrium response to adverse shocks? More generally, do aggregates fluctuate partly because agents occasionally settle on inferior, low-level equilibria? These questions lie at the heart of the current disagreement over how one should view business cycles. This paper estimates an employment model with monetary and real shocks. In one region of the parameter-space the model yields uniqueness, while in the other it yields up to three equilibria. When more than one equilibrium exists, a selection rule is needed. The equilibrium selection rule that we use has a Markovian structure, but the money supply is denied a coordination role -- it can not affect the choice of the equilibrium point. The global maximum likelihood estimates lie in the uniqueness region, implying that instead of being a low-level, coordination-failure equilibrium, the Depression era was caused by movements in fundamentals only. This result held for each of the three subperiods (since 1900) for which the estimation was done, but the estimates are imprecise and the conclusions that we draw from them are tentative. The paper also computes the local maxima in the region of multiplicity, and here some of our estimates indicate that the years 1932 and 1933 would have exhibited low level equilibria had more than one equilibrium existed.

Household production, time allocation, and welfare in Peru

This paper uses the Peruvian Living Standard Survey (PLSS) data to analyze: (a) inequality in the distribution of income; (b) labor market participation of men and women and the variations in hours of work; and (c) the relationship between variations in labor supply and income inequality. It uses a decomposing method to analyze income inequality and utilizes a structural neo-classical model to analyze household production, consumption, time allocation and welfare. The purpose is to study the effect on production, consumption, and time allocation of changes in education and wage rates. Most of the available information on economic inequality in developing countries refers to the distribution of income among earners. Although this information constitutes an important element for understanding the labor market and the related distribution of income, it is less helpful in the analysis of inequality as a welfare issue. A more relevant indicator of welfare is per capita household income or consumption. This paper uses this indicator in an analysis of economic inequality. The methodological approach is based on a summary measure of inequality which is closely related to the Gini coefficient. The essential difference is that the proposed measure of inequality gives more weight than the Gini coefficient to transfers related to the very poor.Economic Theory&Research,Inequality,Environmental Economics&Policies,Work&Working Conditions,Consumption

Analyzing labor supply behavior with latent job opportunity sets and institutional choice constraints.

In this paper we discuss a general framework for analyzing labor supply behavior in the presence of complicated budget- and quantity constraints of which some may be unobservable. The point of departure is that an individual's labor supply decision can be considered as a choice from a set of discrete alternatives (jobs). These jobs are characterized by attributes such as hours of work, sector specific wages and other sector specific aspects of the jobs. We focus in particular on theoretical justification of functional form assumptions and properties of the random components of the model. The paper also includes an empirical application based on Norwegian data, in which the labor supply of married women is estimated.Labor supply; non-convex budget sets; non-pecuniary job-attributes; sector-specific wages

Subsidies on low skilled's social security contributions: the case of Belgium

Belgium is characterised by a comparatively high tax wedge. Starting from the end of the 90’s there has been a growing concern over the effect of high labour costs on the employment of low skilled workers. One of the most innovative measures implemented by the federal government is the targeted reduction on social security contributions for low skilled workers: the Workbonus. The subsidy has increased steadily over the period 2000-2006. At the same time the eligibility to the benefit was considerably extended. The innovative feature of the tax credit is that - differently from other measure existing in OECD countries - eligibility is based on full-time equivalent earnings. The instrument therefore distinguishes between low skill and low effort and avoids the disincentive effect on labour supply at the intensive margin that is typically found in traditional measures means-tested on disposable income or earnings. This paper assesses the effects of the Workbonus on labour supply using different econometric frameworks. In particular, we compare estimates based on a traditional labour supply model, with results based on a modeling framework which accounts for heterogeneity in individuals’ job opportunities. Results show that accounting for demand side constraints leads to significantly lower estimates of labour supply effects. Nevertheless, the measure has a positive impact on labour supply and comparatively low cost per additional job created.Tax-benefit Systems – Microsimulation – Labour Supply – Structural Modeling.

Subsidies on low skilled's social security contributions: the case of Belgium.

Belgium is characterised by a comparatively high tax wedge. Starting from the end of the 90’s there has been a growing concern over the effect of high labour costs on the employment of low skilled workers. One of the most innovative measures implemented by the federal government is the targeted reduction on social security contributions for low skilled workers: the Workbonus. The subsidy has increased steadily over the period 2000-2006. At the same time the eligibility to the benefit was considerably extended. The innovative feature of the tax credit is that - differently from other measure existing in OECD countries - eligibility is based on full-time equivalent earnings. The instrument therefore distinguishes between low skill and low effort and avoids the disincentive effect on labour supply at the intensive margin that is typically found in traditional measures means-tested on disposable income or earnings. This paper assesses the effects of the Workbonus on labour supply using different econometric frameworks. In particular, we compare estimates based on a traditional labour supply model, with results based on a modeling framework which accounts for heterogeneity in individuals’ job opportunities. Results show that accounting for demand side constraints leads to significantly lower estimates of labour supply effects. Nevertheless, the measure has a positive impact on labour supply and comparatively low cost per additional job created.Tax-benefit Systems; Microsimulation; Labour Supply; Structural Modeling;

Compensated discrete choice and the Slutsky equation

Consumers often face choice settings in which alternatives are discrete. Examples include choices between variants of differentiated products, modes of urban transportation, residential locations, etc. In this paper compensated price elasticities and a corresponding (aggregate) Slutsky equation for discrete choice models are derived. A remarkable feature of compensated price elasticities in the discrete case is that they usually are not symmetric, as compensated elasticities with respect to a price increase versus a price decrease may be different. Finally, compensated marginal price effects and elasticities are derived for selected examples.Part of this research has had financial support from the Research Council of Norway (the tax research program) and the Frisch Centre for Economic Research

Aggregate marginal costs of public funds

In this paper, we discuss aggregate measures of marginal costs of public funds (MCF) in populations that are heterogeneous with respect to observed as well as unobserved characteristics. We first discuss how to compute MCF in selected examples of traditional (textbook) labour supply models. Next, we review two types of discrete labour supply models proposed in the literature. Subsequently, we discuss how to calculate aggregate measures of MCF for discrete labour supply models. Finally, we apply an estimated two-sector discrete labour supply model to compute MCF based on Norwegian data

Aggregate marginal costs of public funds

In this paper, we discuss aggregate measures of marginal costs of public funds (MCF) in populations that are heterogeneous with respect to observed as well as unobserved characteristics. We first discuss how to compute MCF in selected examples of traditional (textbook) labour supply models. Next, we review two types of discrete labour supply models proposed in the literature. Subsequently, we discuss how to calculate aggregate measures of MCF for discrete labour supply models. Finally, we apply an estimated two-sector discrete labour supply model to compute MCF based on Norwegian data.publishedVersio

A labor supply model for married couples with non-convex budget sets and latent rationing

The basic assumption in this paper is that individuals make their choices from a set of latent discrete alternatives, called matches. Given the match, hours of work, wages and non-pecuniary characteristics follow. This model allows for very general budget specifications as well as restrictions on job opportunities and hours of work. The model is estimated on Norwegian data from 1979. Some of the results are summarized in wage elasticities and it is demonstrated that they are in the range of what others have obtained. Moreover, aggregate elasticities Which reflect observed as well as unobserved heterogeneity are calculated. We also report estimates derived from alternative specifications of the budget set, ranging from ignorance of taxes at all to a detailed specification of all sorts of taxes and transfers. The results of tax policy simulations are included in the final section of the paper