Accounting for cross-country differences in intergenerational earnings persistence: The impact of taxation and public education expenditure

I document a strong negative cross-country correlation between intergenerational earnings persistence and measures of tax progressivity and level, and between intergenerational earnings persistence and public expenditure on tertiary education. To explain these correlations, I then develop an intergenerational life-cycle model of human capital accumulation and earnings that features progressive taxation, public education expenditure, and borrowing constraints among the determinants of earnings persistence. I calibrate the model to U.S. data and use it to decompose the contributions to earnings persistence from different model elements and to quantify how earnings persistence in the United States changes as I introduce tax and education expenditure policies from other countries. I find that individual investments in human capital account for 73% of the estimated intergenerational earnings persistence in the United States. Taxation, through its impact on investments in human capital, can explain 50% of the variation between the United States and 10 other countries, whereas borrowing constraints, which have received much attention in the literature, have a limited impact on earnings persistence

Essays on the Western Labor Markets

In Chapter 2, Accounting for Cross-Country Differences in Intergenerational Earnings Persistence: The Impact of Taxation and Public Education Expenditure, I study the determinants of cross-country differences in intergenerational earnings persistence between fathers and sons. Western economies exhibit substantial differences in the degree of intergenerational earnings persistence between fathers and sons. Earnings persistence is relatively low in Northern Europe and relatively high in the US, Britain, and Southern Europe. In this chapter I first document that there is a strong negative cross-country correlation between intergenerational earnings persistence and tax progressivity, and intergenerational earnings persistence and public expenditure on tertiary education. I then develop an intergenerational life-cycle model of human capital accumulation and earnings, which features progressive taxation, public education expenditure, and borrowing constraints among the determinants of earnings persistence. I calibrate the model to US data and use it to quantify how earnings persistence in the US changes as I introduce policies from Denmark. Denmark is an interesting example because it is the country in my sample with the highest and most progressive taxes and the greatest expenditure on tertiary education, as well as the lowest earnings persistence. I find that the Danish policies would reduce earnings persistence in the US by reducing parental/individual incentives for investing in human capital, thereby creating a weaker relationship between the parent\u27s financial resources and the child\u27s earnings. Quantitatively, taxation is more important than education expenditure. Introducing a Danish tax policy in the US reduces the intergenerational elasticity of earnings from 0.47 to 0.35, or about 40% of the difference between the US and the Scandinavian countries, which have the lowest earnings persistence among the countries in my sample. I also find that borrowing constraints have a very limited impact on earnings persistence. In Chapter 3, Marriage Stability, Taxation, and Aggregate Labor Supply in the US vs. Europe, which is joint work with Indraneel Chakraborty (SMU, Finance) and Serhiy Stepanchuk (UPenn, Economics), we study the determinants of cross-country differences in aggregate labor supply. Aggregate labor supply is higher in America than in Europe, and there is also substantial variation within Europe. Using micro data from the US and eight European countries, we document that the difference between the US and Europe is mainly driven by the labor supply of women. European women work less than American women, whether it is single women, married women, or women with and without children. Using a larger number of countries, we also document that there is a strong correlation between divorce rates and female employment rates across countries and across time. A recent literature, including Prescott (2004), and Rogerson (2005), argues that differences in labor supply between the US and Europe can largely be explained by differences in tax rates. We use tax data from the OECD to develop tax schedules for a sample of 17 countries. The empirical correlation between hours worked and different measures of tax levels and progressivity is negative, however, weak. Motivated by these observations, we develop a life-cycle model with heterogeneous agents, marriage, and divorce and use it to study the impact of two mechanisms: 1) differences in marriage stability and 2) differences in tax systems on labor supply. There are three types of households; single males, single females and married households. Divorces and marriages occur stochastically. The main channel through which individual divorce and singlehood rates impact labor supply is by reducing the implicit insurance of marriage, and thereby providing incentives for individuals to invest in experience. We calibrate our model to US data and study how labor supply in the US changes as we introduce European tax systems, and as we replace the US divorce and marriage rates with their European equivalents. We find that the divorce and tax mechanisms combined on average explains 28% of the difference between the US and 11 European countries. This finding is sensitive to the use of tax revenues

Accounting for Cross-Country Differences in Intergenerational Earnings Persistence: The Impact of Taxation and Public Education Expenditure

I document a strong negative cross-country correlation between intergenerational earnings persistence and tax progressivity, and between intergenerational earnings persistence and public expenditure on tertiary education. To explain these correlations I then develop an intergenerational life-cycle model of human capital accumulation and earnings, which features, progressive taxation, public education expenditure, and borrowing constraints among the determinants of earnings persistence. I calibrate the model to US data and use it to decompose the contributions to earnings persistence from different model elements and to quantify how earnings persistence in the US changes as I introduce tax- and eduction expenditure policies from other countries. I find that individual investments in human capital accounts for 62% of the estimated intergenerational earnings persistence in the US. Taxation, through its impact on investments in human capital, can explain 25% of the difference between the US and 10 other countries, whereas borrowing constraints have a limited impact on earnings persistence.Intergenerational Earnings Persistence; Taxation; Public Education Expenditure

Marriage stability, taxation and aggregate labor supply in the U.S. vs. Europe

Americans work more than Europeans. Using micro-data from the United States and 17 European countries, we document that women are typically the largest contributors to the cross-country differences in work hours. We also show that there is a negative relation between taxes and annual hours worked, driven by men, and a positive relation between divorce rates and annual hours worked, driven by women. In a calibrated life-cycle model with heterogeneous agents, marriage and divorce, we find that the divorce and tax mechanisms together can explain 45% of the variation in labor supply between the United States and the European countries

Fiscal Consolidation Programs and Income Inequality

We document a strong empirical relationship between higher income inequality and stronger recessive impacts of fiscal consolidation episodes across time and space. To explain this finding, we develop a life-cycle economy with uninsurable income risk. We calibrate our model to match key characteristics of several European economies, including inequality and fiscal structures, and study the effects of fiscal consolidation programs. In our model, higher income risk induces precautionary savings behavior, which decreases the proportion of credit-constrained agents in the economy. These agents have less elastic labor supply responses to fiscal consolidations, which explain the correlation with inequality in the data

How Does Tax Progressivity and Household Heterogeneity Affect Laer Curves?

How much additional tax revenue can the government generate by increasing labor income taxes? In this paper we provide a quantitative answer to this question, and study the importance of the progressivity of the tax schedule for the ability of the government to generate tax revenues. We develop a rich overlapping generations model featuring an explicit family structure, extensive and intensive margins of labor supply, endogenous accumulation of labor market experience as well as standard intertemporal consumption-savings choices in the presence of uninsurable idiosyncratic labor productivity risk. We calibrate the model to US macro, micro and tax data and characterize the labor income tax La er curve under the current choice of the progressivity of the labor income tax code as well as when varying progressivity. We nd that more progressive labor income taxes signi cantly reduce tax revenues. For the US, converting to a at tax code raises the peak of the La er curve by 6%, whereas converting to a tax system with progressivity similar to Denmark would lower the peak by 7%. We also show that, relative to a representative agent economy tax revenues are less sensitive to the progressivity of the tax code in our economy. This nding is due to the fact that labor supply of two earner households is less elastic (along the intensive margin) and the endogenous accumulation of labor market experience makes labor supply of females less elastic (around the extensive margin) to changes in tax progressivity

Investment-Specific Technological Change, Taxation and Inequality in the U.S.

Since 1980 the U.S. economy has experienced a large increase in income inequality. To explain this phenomenon we develop a life-cycle, overlapping generations model with uninsurable labor market risk, a detailed tax system and investment-specific technological change (ISTC). We calibrate our model to match key characteristics of the U.S. economy and study how ISTC, shifts in taxation, government debt and employment have contributed to the rise in income inequality. We find that these structural changes can account for close to one third of the observed increase in the post-tax income Gini. The main mechanisms in play are the rise in the wage premium of non-routine workers, resulting from capital-non-routine complementarity, as well as a reduction of the progressivity of the labor income tax schedule, which increases post-tax inequality. We show that ISTC alone accounts for roughly 15% of the change observed in post-tax income Gini, while the reduction in progressivity accounts for 16%

Investment-Specific Technological Change, Taxation and Inequality in the U.S.

Since 1980 the U.S. economy has experienced a large increase in income inequality. To explain this phenomenon we develop a life-cycle, overlapping generations model with uninsurable labor market risk, a detailed tax system and investment-specific technological change (ISTC). We calibrate our model to match key characteristics of the U.S. economy and study how ISTC, shifts in taxation, government debt and employment have contributed to the rise in income inequality. We find that these structural changes can account for close to one third of the observed increase in the post-tax income Gini. The main mechanisms in play are the rise in the wage premium of non-routine workers, resulting from capital-non-routine complementarity, as well as a reduction of the progressivity of the labor income tax schedule, which increases post-tax inequality. We show that ISTC alone accounts for roughly 15% of the change observed in post-tax income Gini, while the reduction in progressivity accounts for 16%

Acute bronchiolitis in infancy as risk factor for wheezing and reduced pulmonary function by seven years in Akershus County, Norway

BACKGROUND: Acute viral bronchiolitis is one of the most common causes of hospitalisation during infancy in our region with respiratory syncytial virus (RSV) historically being the major causative agent. Many infants with early-life RSV bronchiolitis have sustained bronchial hyperreactivity for many years after hospitalisation and the reasons for this are probably multifactorial. The principal aim of the present study was to investigate if children hospitalised for any acute viral bronchiolitis during infancy in our region, and not only those due to RSV, had more episodes of subsequent wheezing up to age seven years and reduced lung function at that age compared to children not hospitalised for acute bronchiolitis during infancy. A secondary aim was to compare the hospitalised infants with proven RSV bronchiolitis (RS+) to the hospitalised infants with non-RSV bronchiolitis (RS-) according to the same endpoints. METHODS: 57 infants hospitalised at least once with acute viral bronchiolitis during two consecutive winter seasons in 1993–1994 were examined at age seven years. An age-matched control group of 64 children, who had not been hospitalised for acute viral bronchiolitis during infancy, were recruited from a local primary school. Epidemiological and clinical data were collected retrospectively from hospital discharge records and through structured clinical interviews and physical examinations at the follow-up visit. RESULTS: The children hospitalised for bronchiolitis during infancy had decreased lung function, more often wheezing episodes, current medication and follow-up for asthma at age seven years than did the age matched controls. They also had lower average birth weight and more often first order family members with asthma. We did not find significant differences between the RSV+ and RSV- groups. CONCLUSION: Children hospitalised for early-life bronchiolitis are susceptible to recurrent wheezing and reduced pulmonary function by seven years compared to age-matched children not hospitalised for early-life bronchiolitis. We propose that prolonged bronchial hyperreactivity could follow early-life RSV negative as well as RSV positive bronchiolitis