Education and Efficient Redistribution

Should education be subsidized for the purpose of redistribution? The usual argument against subsidies to education above the primary level is that the rich take up most education, so a subsidy would increase inequality. We show that there is a counteracting effect: an increase in the stock of human capital reduces the return to human capital and, therefore, pre-tax income inequality decreases. We consider a Walrasian world with perfect capital and insurance markets. Hence, in the absence of a strive for redistribution, the market generates the efficient level of investment in human capital. When there is a demand for redistribution, the general equilibrium effects on relative wages might make a subsidy to education an ingredient of a second-best optimal redistribution policy. Stimulating human capital formation results in a compression of the wage distribution, and hence reduces the need for distortionary redistributive taxation. We also study the political viability of education subsidies

Tenure Profiles and Efficient Separation in a Stochastic Productivity Model

This paper provides a new way of analyzing tenure profiles in wages, by modelling simultaneously the evolution of wages and the distribution of tenures. Starting point is the observation that within-job log wages for an individual can be described by random walk. We develop a theoretical model based on efficient bargaining, where both log outside wage and log wage in the current job follow a random walk. This setting allows the application of real option theory. We derive the efficient separation rule, which stipulates that workers switch jobs when the difference between the outside wage and the wage in the current job reaches a threshold. The model fits well the observed distribution of job tenures. Since we observe outside wages only at job start and job separation, our empirical analysis of with job wage growth is based on expected wage growth conditional on the outside wages at both dates. Our modelling allows testing of the efficient bargaining hypothesis. The model is estimated on the PSID

An Economic Analysis of Mixing Wastes

Using a general equilibrium model with heterogeneous waste, this paper studies optimal waste policy when households have to exert separation effort to produce near-homogeneous waste streams suitable for recycling. Our model explicitly allows for changes in the composition (quality) of waste streams depending on how much effort households are willing to spend on separating different types of waste. Accordingly, we are able to generalize some earlier contributions to the waste management literature and demonstrate that with both mixing and effort included, a first-best optimum is feasible under reasonable conditions. In particular, we find that a (modified) deposit-refund system still provides the optimal incentives to guide recycling as well as legal disposal (landfilling) and illegal dumping. Both the number and level of taxes and subsidies needed to reach the first-best depend crucially on the socially optimal level of dumping as well as the socially optimal composition of the mix

An Empirical Measure for Labor Market Density

In this paper we derive a structural measure for labor market density based on the Ellison and Glasear (1997) index for industry concentration''. This labor market density measure serves as a proxy for the number of workers that can reach a certain work area within a reasonal amount of traveling time. We apply this measure to a standard wage equation and find that it takes account of almost half of the cross region wage variance (not explained by other observables). Moreover, it explains substantiallly more than the traditional density measure: people per square mile

Search and the City

Can increasing returns to scale in search explain regional differentiation between cities and rural areas? To answer this question, we develop a model of an economy that consists of several regions. Within each region, jobs and workers are heterogeneous by respectively skill and job complexity type. Because of the search frictions, firms and workers in each region must trade-off a better expected match quality against a longer period of non-production. Labor mobility between regions induces the equalization of reservation wages for each skin type and interregional trade of end products yields regional specialization in production. The model predicts that high density areas make use of their scale advantage by producing end products with a high dispersion of skin requirements. Empirical evidence for the United States corroborates the implications of the model

Are Education Subsidies an Efficient Redistributive Device?

We argue that promoting education may be a means to re- duce income inequality. When workers of different skilllevels are imperfect substitutes in production, an increase in the level of human capital in the economy reduces the return to education and, hence, pre-tax income inequality. The compression of pre- tax wages implies that a given inequality of after-tax incomes can be reached with a less progressive income tax. Optimal redistri- bution policy faces a trade-off between the distortionary effect of progressive income taxation and the distortions arising from education subsidies. The optimal level of education subsidies cru- cially depends on the extent to which education compresses the wage distribution, the distortionary effect of progressive income taxation, and the political desire to redistribute income. We dis- cuss empirical evidence showing that the economy's average years of schooling has a strong effect on pre-tax income inequality. We compute for a number of OECD countries the level of education subsidies that could be justified on redistributive grounds. Our argument for education subsidies goes a long way towards ex- plaining the actual pattern and level of education subsidies in OECD countries

How large are Search Frictions?

This paper presents strong evidence for the concavity of wages in job and worker characteristics by adding second order terms to a Mincerian earnings function for 6 OECD countries. Under a standard normality assumption, this concavity cannot be attributed to unobserved components in those characteristics. An assignment model with search frictions provides a parsimonious explanation for our findings. This model yields two restrictions on the coefficients which fit the data very well. The impact of search frictions on wages is large. Our results relate to the literature on industry wage differentials, on structural identification in hedonic models, and on wage posting versus Nash bargaining in search models

A Structural Model of Tenure and Specific Investments

Though a lot of work has been done on the distribution of job tenures, we are still uncertain about its main determinants. In this paper, we stress random shocks to match productivity after the start of an employment relation. The specificity of investment makes hiring and separation decisions irreversible. These decisions therefore have an option value. Assumptions on risk neutrality, efficient bargaining, and the efficient resolution of hold up problems allow investment and separation decisions to be analyzed separately from wage setting. The tenure profiles in wages implied by the model fit the observed pattern quite well. The model yields a hump shaped pattern in separation rates, similar to learning models, but with a slower decline after the peak. Estimation results using job tenure data from the NLSY support this humped shaped pattern and favor this model above the learning model. We develop a methodology to analyze the decomposition of shocks to match productivity into idiosyncratic and macro-level shocks. When assuming a Last-In-First-Out (LIFO) separation rule, this model of individual employment relations is embedded in a model of firm level employment, that satisfies Gibrat's law. The LIFO rule is interpreted as an institution protecting the property rights on specific investments of incumbent workers against hiring new workers by the firm

Micropremie en macroparadox

Het nieuwe financiële toetsingskader voor de pensioensector heeft een procyclische uitwerking. Om dit ongewenste effect te voorkomen, moet het toetsingskader beter aansluiten bij de moderne beleggingstheorie

Generational Accounting, Solidarity and Pension Losses

The creeping stock market collapse eroded the wealth of funded pension systems. This led to political tensions between generations due to the fuzzy definition of property rights on the pension funds wealth. We argue that this problem can best be resolved by the introduction of generational accounts. Using modern portfolio and consumption planning theory we show that the younger generations should have the higher equity exposure due to their human capital. Capital losses should be distributed smoothly over lifetime consumption. When stock markets are depressed equity should be bought, savings and consumption should be scaled down equiproportionally, and retirement should be postponed. Portfolio investment restrictions are quite costly