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This paper explores theoretically and empirically the issue of time-varying relative risk aversion. We analytically solve a parsimonious life-cycle portfolio choice model with the preferences given by Greenwood, Hercowitz and Huffman (1988, GHH). Our analytical solution identifies four partial equilibrium effects in our model with GHH preferences on risky shares through two channels, and two net effects whose signs hinge on the value of a key structural parameter. With household-level micro data, our mean and quantile regression results show that wealth negatively affects risky shares and the estimated effects are statistically significant and robust. This finding provides strong evidence to support our theoretical prediction. Thus, we show successfully that our portfolio choice model with GHH preferences provides a plausible underlying mechanism in understanding the wealth effect on risky shares in the microdata. Furthermore, we conclude that such a mechanism alone is not sufficient in explaining how risky shares respond to labor income and labor income risks in the microdata.

This paper scrutinizes the role of prolonged, expansionary monetary policy on the saving behavior of Japanese households, focusing on the dramatic change of the household savings rate since 1998, from high to low saving. The literature generally attributes this change to the country’s shift from high-growth to low-growth and its demographic change. This paper empirically examines changes in the incentives for saving and the ability to save connected to monetary policy. It finds that monetary policy had a significant impact on Japan’s household saving behavior via the interest rate channel but not the labor income channel. There is also evidence that rising government deficits come along with declining household saving and that rising wealth boosts saving.

How important is the planning horizon of households for the effects of fiscal plans? We address this question through the lens of a New-Keynesian model where households are boundedly rational and plan over a finite number of periods. We show that the planning horizon affects the medium-run cumulative multipliers significantly. Government spending cumulative multipliers increase with the horizon while labor tax cumulative multipliers drop, in absolute terms. In light of the recent debt crisis in the Euro Area, we look at spending cuts and labor income tax hikes. In line with the empirical literature, we find in our benchmark calibration that spending cuts are less recessionary than tax hikes. Looking at the interaction between the planning horizon and the persistence of the fiscal plans, we find that spending cuts become less recessionary while tax hikes more recessionary when the persistence of fiscal plans rise, and that this effect is amplified by shorter planning horizons. Introducing wage stickiness, we show that for very sticky wages, tax hikes become less recessionary than spending cuts, but that intermediate levels of wage stickiness have the opposite effect on fiscal multipliers when planning horizons are finite.

This paper investigates the dispersions in days worked and wages by adapting a novel semi-parametric specification that minimizes assumptions about life-cycle labor income dynamics. Data for Italy shows a substantial increase in income inequality after age 50 for males over the time span from 1985 to 2012, which is remarkably driven by the variations in days worked rather than wages. Results show that this increase is determined by permanent changes in the number of days worked. I also introduce an empirical strategy to decompose the cross-covariances of wages and working days to quantify the permanent and transitory responses of days worked to wage shocks. A one-percent increase in permanent wages increases the permanent days worked by 0.8% at the age of 28, while this increase is about 0.3% at the age of 55. Despite the strong reaction of days of work to wage shocks early in careers, the correlation coefficients are small, indicating that only a small share of variation in permanent days worked – which shapes the permanent income inequality – is explained by the changes in wages.

Does parental wealth inequality impact next generation labor income inequality? And does a tax on parental wealth affect the labor income distribution of the next generation? We tackle both questions empirically using detailed intergenerational data from Norway, focusing on effects on wages rather than capital income. Results suggest that a net wealth of NOK 1 million increases wages of the children by NOK 14,000. Children of wealthy parents also have a higher labor income mobility. The estimated hypothetical wage distribution without the wealth tax is more unequal. Moreover, suggestive evidence indicates parental wealth is associated with higher labor risk taking.

This study analyzes the effect of immigration on intergenerational income mobility of natives. I exploit a large quasi-natural policy experiment that led to variation across time and space in exposure to cross-border immigrants: The incremental removal of restrictions for cross-border immigrants in Switzerland in regions close to the border. The study draws from several administrative data covering the universe of labor income, family linkages, and census data. Results show that children from low-income parents experience a stronger decrease in labor income than children from high-income backgrounds. While children from the bottom quintile experience a 3 to 6 percent decrease in labor income, the effect for children from the top quintile is close to zero or slightly positive. Subsequently, intergenerational income mobility, measured as the rank difference between children from the lowest and the highest parent percentile, decreases by 1.5 percentile ranks or 12 percent in relative terms. The income of children from low-income backgrounds decreases more because they are more likely to learn occupations and to choose educational tracks which are more negatively affected by the immigrant influx. Also, there is no adaption in educational or occupational choices that could mitigate the negative labor income effect.

This paper evaluates the impacts of China's massive drinking water program on labor reallocation and rural development. Using representative survey data, we find that improved access to drinking water at the village level significantly increased off-farm employment and household labor income. The transformation toward off-farm development was inclusive: increased access to drinking water affected lower income households more favorably, enhanced local off-farm employment without inducing outward migration, and benefited females and males equally. A back-of-the-envelope calculation shows that the program helped reallocate 32 million rural people to off-farm sectors and raised their annual per capita income by US$108 at a lump-sum cost of US$30 per person.

As part of the Colombian government's strategy to support the armed-conflict victims, a Graduation Program called "Transformando Mi Futuro" (Transforming my future) was implemented. Unlike other graduation programs, this one targets the urban population and has no assets transfers. To evaluate this program, a Results Evaluation (Before/After) approach was performed using the information collected before and after implementing the program. The main results show positive changes in well-being and a reduction in the gap between the actual perception of well-being and the expectations for two and five years, and positive changes in labor income and savings. These results suggest that the program contributed to improving the living conditions of participating households. However, heterogeneity analysis shows that impacts are differentiated according initial status of participants. This exercise is part of the set of evaluations carried out within the Platform for Evaluation and Learning of the Graduation Program in Latin America (http://www.plataformagraduacionla.info/).

I present a model in which (1) a more talent-demanding task increases both rewards for high talent and the penalty for low talent due to a greater fixed cost of production, and (2) individual talent is task-specific and talent updates occur only for tasks near the attempted task, which implies a task-sequence problem in which the initial task constrains subsequent task choices. Rising talent rewards and penalty stemming from a rising scale economy motivate young workers to choose a more talent-demanding task, raise the failure rate (i.e., the probability of the updated talent being lower than the exit threshold), and concentrate income gains in a diminishing fraction of high-talent workers. Rising talent rewards and penalty also increase the share of young workers subject to binding minimum current-income constraints, thus increasing the dispersion of tasks among young workers. The model sheds light on the rising stratification of careers among young workers and the rising polarization of the residual labor income distribution (i.e., the labor income distribution controlling for observable worker characteristics such as education and age).

We study the short-run impacts of labor income taxation in an aggregate economy of N>2 regions. The distinct regions demand workers. Each region is endowed with one unit of immobile capital. The aggregate economy also has one unit of labor that is mobile across the regions. All regions produce a final good with identical Cobb-Douglas production functions. The price of output is normalized to unity. We perform five tasks. First, we focus on the benchmark case in which no region taxes either capital or labor. We find the equilibrium wage, the allocation of workers across the regions, and the total income of labor and capital. Second, we study the impact of a tax τ on labor income in region 1 when the other N-1 regions do not tax labor income. We ascertain the after-tax return to labor in region 1, the equilibrium wage, and the allocation of labor across the regions. Third, we compute the total income of capital and labor and the tax revenue in region 1. Fourth, we discuss whether workers in region 1 are better off with a tax on labor income. Finally, we comment on the policy implications of our research.

The aim of this paper is to study the gender pension gap in Europe based on the newest EU-SILC data from the 2018 wave. The contribution of the paper is twofold. First, it provides evidence on factors shaping the gender pension gap in a large number of EU countries. Second, it analyses the relationship between the pension gap and: (1) the coverage of occupational (second pillar) pensions and (2) gender attitudes. The main factor contributing to gender inequality in pension income is the number of years in employment. The influence of tertiary education is in the direction of increasing the gap, while the effect is the opposite when the hourly labor income gap is considered. The higher coverage of occupational pensions corresponds to a higher gender pension gap. This implies that the privatization of pension plans can lead to the conversion of a wage gap into a pension income gap and reinforces women’s disadvantage after retirement. In addition, a positive relationship is observed between unexplained portions of the pension income gap and the labor income gap. This could justify the hypothesis that unexplained portions are formed by the same factors persistent over time. One such factor could be gender norms; it has been found that countries with more gender equality support have lower unexplained portions of the labor income and pension gaps.

The optimal labor income taxation problem is cast in the context of the Polish economy. We use the actual Polish data on labor income and the corresponding tax revenue provided by the Polish Tax Authority to calibrate the optimal taxation Problem of Mirrlees to the Polish data. We solve the optimal taxation problem in a variety of contexts using numerical techniques. We provide solutions to the optimal labor income taxation problem, examine the sensitivity to the underlying parameters. In general, our numerical results confirm that the solutions are affected, in particular, by the elasticity of labor supply with respect to the wage, and by the preferences of policy makers. Still, in the qualitative sense the optimal marginal tax rates normally take the form of an inverted U-shaped curve when depicted in terms of income earned. We establish that the quantitative results are sensitive to the underlying parameters. In one extreme, the optimum calls for high optimal marginal tax rates reaching nearly 75% for moderate income levels when the elasticity of labor supply is low and the degree of aversion towards inequality is high. On the other hand the optimal marginal tax rates can be low for moderate income levels when the elasticity of labor supply with respect to the wage is high and when the aversion towards inequality is low. In addition, we show that marginal tax rates at low income levels can be high, which is supposed to encourage higher labor supply by low earners. Finally, our solutions reveal that universal basic income is a part of the optimum regardless of the values of the underlying parameters.

Using a two-country model with heterogeneous firms, we show that the optimal level and welfare gains of foreign direct investment (FDI) subsidies critically depend on how they are funded. In a setting that resembles common tax distortions in emerging markets, we compare the effects of distortionary taxes that are imposed to fund FDI subsidies and examine their cross-country spillovers. Our model predicts that the optimal level of FDI subsidies and the associated welfare gains are much lower than those for non-distortionary taxes. FDI subsidies funded by distortionary taxes are also found to be beggar-thy-neighbor, although they generate positive cross-country welfare spillovers if funded by non-distortionary labor income taxes.

This paper shows that labor income plays an important positive role for the decision to work after retirement. Especially individuals who have the chance to substantially supplement their pension entitlements have a higher earnings elasticity. Men are more attracted by earnings incentives than women. Also individuals who work until retirement can easier be attracted by financial incentives to work after retirement than those with bridge options. Our analysis is based on a representative and large administrative individual career data set that includes employer information. We use an endogeneity correction model to estimate labor and nonlabor financial determinants of labor market participation after retirement.

We consider an infinite-horizon economy populated by two types of individuals, some individuals being more productive than others. Individuals live one period and are altruistic toward their children. Assuming that the allocation received by a given individual depends only on his type and the one of his parent, we first determine the second-best steady state allocation and then study the optimal bequest and labor income tax functions, that are assumed to be separable. We first show that the second-best is not implementable with such tax schedules. We then demonstrate that it may be desirable to tax large bequests (and to subsidize low bequests), provided that individuals are sufficiently altruistic and the less productive individuals are sufficiently numerous. The taxation of large bequests is however not always part of the optimal solution. A numerical example suggests that no taxation of bequests is needed under moderate altruism, while large bequests should be subsidized when individuals are poorly altruistic.

We develop a new factor content approach to study the impact of trade on inequality. Our analysis generalizes the theoretical results of Deardorff and Staiger (1988) and improves on past empirical implementations of these results. Combined with unique administrative data from Ecuador, our approach yields measures of individual-level exposure to exports and imports, for both capital and labor income, as well as estimates of the incidence of such exposure across the income distribution. We find that international trade raises earnings inequality in Ecuador, especially in the upper-half of the income distribution. However, the drop in inequality experienced by Ecuador over the last decade would have been less pronounced in the absence of trade. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

The COVID-19 pandemic has wrought havocs on economies around the world. Yet, barely any evidence currently exists on the distributional impacts of the pandemic. We provide the first study that offers new theoretical and empirical evidence on the distributional impacts of the pandemic on different income groups in a multi-country setting. Analyzing rich individual-level data from a six-country survey, we find that while the outbreak has no impacts on household income losses, it results in a 65-percent reduction in the expected own labor income for the second-poorest income quintile.The impacts of the pandemic are most noticeable in terms of savings, with all the four poorer income quintiles suffering reduced savings ranging between 5 and 7 percent compared to the richest income quintile. The poor are also less likely to change their behaviors, both in terms of immediate prevention measures against COVID-19 and healthy activities. We also find countries to exhibit heterogeneous impacts. The United Kingdom has the least household income loss and expected labor income loss, and the most savings. Japanese are least likely to adapt behavioral changes, but Chinese, Italians, and South Koreans wash their hands and wear a mask more often than Americans.

In this paper we present solutions to the optimal taxation problem in Poland in the case of high income earners. We characterize the actual data provided by the Polish Tax Authority and show that it is thick-tailed in the upper end of the distribution. Specifically, we show that income distribution in Poland can be approximated with a Pareto distribution with parameter equal to 3:44; which makes the Saez’s formula applicable. We show that the value of the optimal marginal tax rates in Poland ranges between 16% and 60% for high income earners depending on the value of the elasticity with respect to the wage. Moreover, we show that the value of the optimal marginal tax rate for high income earners can be close 60% when one accepts - an empirically viable - relatively low value of the elasticity of labor supply with respect to the wage.

In this paper we investigate the effect of standard and non-standard monetary policy implemented by the ECB on income inequality in Italy. We use for the first time the survey microdata on Income and Living Conditions (EU-SILC, Istat) in a repeated cross-section experiment to build measures of inequality and the distribution over time for incomes and subgroups of individuals. The identification strategy is based on surprises estimated in the EA-MPD database for the Euro Area. Using a battery of Local Projections, we evaluate the impact of monetary policy by comparing the performance of the impulse response functions of our inequality measures in different policy scenarios (pre and post-QE). The main findings show that an expansionary unconventional monetary policy shock compressed inequality of disposable and labor income more persistently than a conventional monetary shock. The financial channel has an equalizing effect favoring the less wealthy households mainly in the long-run. Overall, our evidence suggests that QE is associated with a decrease in Italian households inequality.

As part of the CARES Act, the IRS distributed $300 billion in Economic Impact Payments (EIPs) directly to US households. In the Census Bureau’s Household Pulse Survey, almost 75% of households receiving an EIP reported using it to mostly pay for expenses. Separating respondents based on labor income interruptions, 84% of unemployed households reported mostly spending their EIPs, compared to 63% of employed households, suggesting that the benefits of more targeted direct transfers may have been limited, especially at the expense of timeliness. Overall, I conclude that Economic Impact Payments played an important role in stabilizing aggregate spending.

The recent debate about the falling share of labor income has brought attention to the trends in income shares, but less attention has been devoted to their variability. In this paper, we analyze how their fluctuations can be insured against between workers and capitalists, and the corresponding implications for financial markets. We study a neoclassical growth model with aggregate shocks that affect income shares and financial frictions that prevent firms from fully insuring idiosyncratic risk. We examine theoretically how aggregate risk sharing is distorted by the combination of idiosyncratic risk and moving shares. Accumulation of safe assets by firms and risky assets by households emerges naturally as a tool to insure income shares’ risk. We calibrate the model to the U.S. economy and show that low interest rates, rising capital shares, and accumulation of safe assets by firms and risky assets by households can be rationalized by persistent shocks to the labor share.

The COVID-19 economic crisis differs from past recessions in terms of the sectors and occupations that are being hit first. In this paper we propose a model with sectoral and occupational heterogeneity and non-homothetic preferences over sectors. That is, households' consumption bundles depend on income and they cut consumption on high income-elastic sectors when labor income falls. We first document that contact intensive occupations are concentrated in just a few, high-income-elasticity sectors. By contrast, production/manufacturing occupations are distributed widely across sectors. We then compare a COVID-19 type shock affecting service sectors first to a more ``standard" recession affecting manufacturing in our model calibrated to match the U.S. economy. Our main result is that the increase in labor income inequality in the COVID-19 recession is one and a half times the increase in a normal recession due to the fact that contact intensive service workers are low income and work mainly in high income-elasticity sectors.

We study quantitatively how uncertainty in expected stock return predictability affects life-cycle portfolio choice and wealth accumulation in the presence of undiversifiable labor income risk. Households filter information about future expected returns from observed predictors and realized stock returns. Therefore, optimal portfolio choice does not only depend on financial wealth and age, as in more traditional life-cycle models. Counterfactuals demonstrate the magnitude of portfolio demand changes that depend on perceptions about underlying expected returns. On average, life-cycle asset allocation becomes more conservative than models with either i.i.d. stock returns, or clearer signals about expected stock returns.

We investigate cyclicality of variance and skewness of household labor income risk using PSID data. There are five main findings. First, we find that head's labor income exhibits countercyclical variance and procyclical skewness. Second, the cyclicality of hourly wages is muted, suggesting that head's labor income risk is mainly coming from the volatility of hours. Third, younger households face stronger cyclicality of income volatility than older ones, although the level of volatility is lower for the younger ones. Fourth, while a second earner helps lower the level of skewness, it does not mitigate the volatility of household labor income risk. Meanwhile, government taxes and transfers are found to mitigate the level and cyclicality of labor income risk volatility. Finally, among heads with strong labor market attachment, the cyclicality of labor income volatility becomes weaker, while the cyclicality of skewness remains.

We propose a model where heterogeneous investors endogenously enter or exit the stock market. We characterize the equilibrium and present a novel conditional consumption-CAPM. The model implies a mild procyclical market entry and countercyclical exit. This small change in the composition of stockholders implies a strongly countercyclical stockholders’ amount of consumption risk while maintaining a procyclical aggregate consumption risk. The price of consumption risk dynamics is affected by two counterbalancing effects: consumption re-distribution and market entry/exit. We find that the latter effect dominates the former, leading to a procyclical price of consumption risk. Overall, our model provides a new perspective on the main drivers of asset dynamics. It is the procyclical consumption risk-sharing implied by changes in stockholders' composition that contributes to the dynamics of risk premium, excess volatility, and price-dividend ratio. We provide empirical evidence on market participation, amount of risk, and price of risk supporting our theory.

How important is human capital at the top of the U.S. income distribution? A primary source of top income is private “pass-through” business profit, which can include entrepreneurial labor income for tax reasons. This article asks whether top pass-through profit mostly reflects human capital, defined as all inalienable factors embodied in business owners, rather than financial capital. Tax data linking 11 million firms to their owners show that top pass-through profit accrues to working-age owners of closely held mid-market firms in skill-intensive industries. Pass-through profit falls by three-quarters after owner retirement or premature death. Classifying three-quarters of pass-through profit as human capital income, we find that the typical top earner derives most of her income from human capital, not financial capital. Growth in pass-through profit is explained by both rising productivity and a rising share of value added accruing to owners.

Using blind and non-blind evaluations, we show that the common identification strategy of gender bias in schools cannot identify a weighted average of gender bias for different ability levels due to the discrete nature of grades. We propose a new method, similar in spirit to matching, that enables the identification of heterogeneity in gender bias along both observable and unobservable dimensions. Utilizing our estimator, we quantify the difference-in-difference estimator to have a bias of approximately 30 percent of the true effect in our Norwegian high school data, and we find that gender bias can explain most of the average grade gap between male and female students. Low-ability students are exposed to the highest levels of bias in a classroom setting, and a one-standard-deviation-higher expected bias leads to students, on average, losing $750–1,000 in labor income each of the first five years after high school graduation.

Spanish Abstract: Una de las grandes problematicas laborales es la discriminacion que enfrentan distintos grupos poblacionales, y particularmente las mujeres. Los menores niveles de ingreso frente a la misma calificacion y caracteristicas productivas, es lo que se considera tradicionalmente como brechas en remuneracion por discriminacion. El proposito de este documento es tener un marco analitico comparado, unificado y actualizado de las distintas metodologias de estimacion de brechas en remuneracion entre hombres y mujeres ocupados y asalariados en Colombia. Para ello se toma como referencia el ingreso laboral horario observado, y se estiman las diferencias para la media condicional (Mincer, 1974) y distintos puntos de la distribucion (Koenker y Bassett, 1978), con correccion de sesgo de seleccion (Heckman, 1979; Neuman & Oaxaca, 2004), asimismo se descompone la brecha en efectos dotaciones y remuneracion (Oaxaca, 1973; Blinder; 1973; Machado y Mata, 2005; Melly, 2005). El principal resultado es que la brecha en remuneracion por genero existe, y es explicada en gran parte por un potencial de discriminacion. La brecha por discriminacion es mayor en la parte baja y alta de la distribucion, y se reduce en posiciones medias. Lo anterior evidencia la importancia de generar politicas que reduzcan la informalidad, garanticen ecuanimidad en cargos directivos y fortalezcan las instituciones laborales. English Abstract: Labor discrimination is a primary issue, which has to be faced by several population groups, among them women. When a worker is paid lower even though he/she has the same qualifications or productive characteristics than other workers, it is said that he/she are discriminated. The aim of this paper is to analyze the earnings gaps associated with gender considering different statistical methodologies, and to develop a comparative and unified outline. To do so, hourly labor income is considered as the reference, and there are estimated conditional mean earnings gaps (Mincer, 1974), through the conditional distribution (Koenker & Bassett, 1978), and the corrections of selection bias are made (Heckman, 1979; Neuman & Oaxaca, 2004). Likewise, decompositions of the earnings gaps in endowments and coefficients effects are calculated (Oaxaca, 1973; Blinder; 1973; Machado & Mata, 2005; Melly, 2005). The main result is the evidence of the gender earnings gaps, and the large extent of it is explained by discrimination. Besides, the gap is higher in the bottom and the top of the conditional distribution. As a result, this empirical evidence shows the importance of promote public policies that diminish informality, guarantee equality in management jobs and make labor institutions stronger.

In this short study, we quantify the gender pension gap in Germany and examine how much more women would have to save for retirement to close it. The gender pension gap is first computed as an average across all employees and then split up into various age cohorts and occupations. Based on a broad database on wage income obtained from the Institute of Employment Research (IAB), to which all German businesses have to report, we estimate each employee’s statutory pension entitlements and find that the gender pension gap in Germany amounts on average to 26 %. While we do not observe a significant gender pension gap for employees below 35 years of age, the gender pension gap gets larger for older age cohorts. We argue that the decision to start a family is the most likely explanation for this pattern. As female labor force participation reduces drastically after giving birth, and never fully recuperates, labor income decreases and so do stat-utory pension entitlements of women. The gender pension gap is lower, and sometimes even negative for occupations where salaries are heavily regulated (for example, municipal clerks) and for occupations that are predominantly performed by women (for example, child care workers). It increases for occupations where sala-ries depend more on employees’ negotiation skills. We also compute how the gender pension gap can be closed, i.e., how much more women would have to save to make sure that they have the same pension payments (supplemented by their savings) than men upon retirement. We find that in most cases, the additional savings amount needed makes only up for a small fraction of women’s annual income, ranging between 1-2% for most age groups and occupations.

The purpose of this paper is to study the optimal retirement and consumption/investment decisions of an infinitely lived agent who does not tolerate any decline in his/her consumption throughout his/her lifetime. The agent receives labor income but suffers disutility from working until retirement. The agent’s optimization problem combines features of both singular control and optimal stopping. We use the martingale method and study the dual problem, which can be decoupled into a singular control problem and an optimal stopping problem. We provide a closed-form solution of the optimal strategies for the von Neumann–Morgenstern utility function. We show that the coefficient of relative risk aversion implied by the optimal portfolio (i.e., the implied coefficient of relative risk aversion, ICRRA) is a constant value smaller than 1. Moreover, we show that the ICRRA is independent of the agent’s felicity utility function and depends only on the subjective discount rate and market parameters.

This paper shows that the impact of labor income risk on the cross-section of expected stock returns depends crucially on the horizon. Using a flexible empirical approach that allows us to include multiple horizons simultaneously, we find robust evidence that the two- to four-year horizon strongly dominates. Labor income risk at this medium term horizon carries a highly significant price of risk, while at other horizons it does not. A simple two-factor model that includes the equity market return and labor income risk at the medium term horizon can explain a striking 71% of the cross-sectional variation of 25 size book-to-market and 25 size-investment portfolios. This is a significant improvement over the standard human capital CAPM with quarterly labor income growth that has an R-squared of only 7%. Also, labor income risk generates significant adjustments to the composition of the optimal risky equity portfolio at the medium term horizon. These results are consistent with wage stickiness, where wages are reset every two to four years.

This paper explores theoretical implications and empirical evidence of GHH preferences [Greenwood et al. (1988)] over portfolio choices. First, we analytically solve a parsimonious life-cycle portfolio choice model with the GHH preferences and endogenous labor-leisure choice. Second, our analytical solution identifies four effects due to the GHH preferences (through endogenous labor-leisure choices) on risky shares; and it shows that two net effects hinge on the value of one key structural parameter. Third, we empirically test main theoretical predictions with the Panel Study of Income Dynamics data. Overall, the estimation results provide empirical evidence in support of certain key implications out of GHH preferences. Thus, our analysis sheds light on one of the most fundamental, yet highly contentious, questions in quantitative macroeconomic analysis: the choice of utility functions in a representative agent model when portfolio choices are of concern.

In 2017, Congress drastically reduced the corporate tax rate and provided an unprecedented deduction under section 199A for qualifying passthrough business income. Although purportedly necessary to maintain tax parity between income earned in corporate and noncorporate form, section 199A encourages active high-income passthrough owners to misclassify labor income as business profit, thereby reducing both income and employment taxes. This Article considers how section 199A is likely to affect choice of entity among different passthrough forms. Prior to the 2017 legislation, S corporations had an advantage over other passthroughs because of their ability to convert owner compensation into S corporation income not subject to employment taxes (or the section 1411 tax). Under the 2017 legislation, it is unclear whether S corporations will continue to represent the superior choice of passthrough entity. Section 199A provides a perverse incentive for S corporations to understate or overstate owner compensation depending on which technique minimizes combined income and employment taxes. The Treasury’s decision to limit the reasonable compensation guardrail to S corporations highlights the anachronistic employment-tax treatment of passthrough entities, as well as the lack of any coherent rationale for preferential treatment of passthrough income. The Article concludes that section 199A offers a fertile field for income-shifting and potentially undermines the rationale for maintaining Subchapter S.

We show that the decision to participate in the stock market depends on the ability of equities to hedge the individual permanent earnings shocks, consistent with implications of life-cycle models. Those households who refrain from stock investing display positive correlation between their own permanent income innovations and market returns. These results owe to a two-step empirical strategy. First, a minimum distance estimation disentangles the aggregate from the idiosyncratic permanent component of labor income risks. The second step reconstructs the individual life-cycle dynamics of persistent shocks through a Kalman filter applied to the estimated labor income process. We are thus able to obtain the full cross-sectional distribution of individual correlations between permanent shocks and market returns.

This paper examines the interaction between altruism towards offspring and precautionary savings. It investigates whether increased uncertainty in children labor income fosters savings of parents. We first construct a two-periods and two-generations model, to underline which are the mechanisms behind the intergenerational precautionary motive for savings. Second, we exploit two micro datasets to test the main theoretical implications. Parents’ consumption turns out to respond to the offspring’s income risk. This result is robust to the presence of family fixed effects and to many alternative empirical specifications.

Previous literature provided mixed evidence regarding the effects of two major tax instruments, namely, labor income taxes and corporate taxes on economic growth. We hypothesize that the mixed evidence may be due to state-dependency of labor taxes. While corporate taxes retard economic growth by discouraging entrepreneurship in a linear fashion, the negative effect of labor taxes on growth may depend on the state of the economy, and may, thus, be non-linear. We provide a simple theoretical model which supports the latter hypothesis, and empirically test our predictions by using both statutory and average tax rates for a sample of 19 OECD countries over the 1981–2005 period. We also contribute to the literature by employing a newly developed Panel Smooth Transition (PSTR) model that controls for non-linearities in the tax structure-economic growth relationship. Our empirical findings suggest that while taxes on corporate income are distortionary for growth in both high- and low-growth regimes, taxes on labor income are harmful only during the high-growth regime.

How do labor market frictions affect optimal redistributive policies? Are current real world policies efficient? To answer these questions and assess their quantitative relevance we embed an otherwise standard Mirrlees’ (1971) economy in a directed search environment. Effort and employment probability wedges must have the same sign for an allocation to be efficient. Moreover, constrained efficient allocations are shown to be monotonic in both effort and the probability of finding a job, a property that is not implied by incentive compatibility. After showing that labor income tax schedules along with unemployment benefits do not suffice to implement constrained efficient allocations, we describe tax instruments that do. Our optimal policy formulae can be used to derive an allocation which improves upon any constrained inefficient, and cannot be improved upon by local reforms. We calibrate our model to match data for the US economy and quantify the gains from moving to an optimal policy, finding that it leads to a 2.17% increase in Government revenues.

This paper explores the impact of the 2007 European Union enlargement on the consumption behaviour of immigrant households. Using data from a unique Italian survey and a difference-in-differences approach, we find that the enlargement induced a significant consumption increase for the immigrant households from new member states both in the short and in the medium run. This enlargement effect cannot be attributed to the mere legalization as it concerns both undocumented and documented immigrants, albeit through different channels. Detailed information on immigrants’ legal status (undocumented/documented) and sector of employment (informal/formal) allows us to shed light on the exact mechanisms. Following the enlargement, previously undocumented immigrants experienced an increase in the labour income by moving from the informal towards the formal economy, whereas immigrants who were already working legally in Italy benefited from the increased probability of getting a permanent contract. Enhanced employment stability in turn reduced the uncertainty about future labour income leading to an increase in documented immigrants’ consumption expenditure.

Macroeconomic models routinely abstract from two features of the US federal tax code: the joint taxation of ordinary capital and labor income, and the special taxation of preferential capital income. In this paper we argue that this abstraction omits a `portfolio-effect' mechanism where endogenous changes to the ordinary-preferential composition of households' capital income influence individuals' optimal labor and saving decisions through its impact on their effective marginal tax rates. We demonstrate the quantitative importance of this tax detail by simulating provisions from the recently enacted “Tax Cuts and Jobs Act” using a heterogeneous-agent overlapping generations framework with two production sectors.

We consider an infinite horizon portfolio problem with borrowing constraints, in which an agent receives labor income which adjusts to financial market shocks in a path dependent way. This path-dependency is the novelty of the model, and leads to an infinite dimensional stochastic optimal control problem. We solve the problem completely, and find explicitly the optimal controls in feedback form. This is possible because we are able to find an explicit solution to the associated infinite dimensional Hamilton-Jacobi-Bellman (HJB) equation, even if state constraints are present. To the best of our knowledge, this is the first infinite dimensional generalization of Merton's optimal portfolio problem for which explicit solutions can be found. The explicit solution allows us to study the properties of optimal strategies and discuss their financial implications., 32 pages, 0 figures

There are two fundamental reasons why factor shares have traditionally been overlooked in the economic literature. First, because of their nature, factor shares are conceptually difficult to define and measure. Second, they have for a long time been perceived as constant across time and space. We evaluate five different methodologies of estimation commonly used in the labor share literature and propose a new measurement. We then compile a global dataset of the labor income share across 151 economies—both developing and developed—for all or part of the period 1970–2015. Results show that our suggested indicator is correlated to the other five measures but it also retains unique information. Contrary to the traditional assumption of stable factor shares, we document the existence of considerable heterogeneity across economies and variability over time. Specifically, there has been a general decline in the labor share around the world, in particular from the mid-1980s onward.

We document the time-series of employment rates and hours worked per employed by married couples in the US and seven European countries (Belgium, France, Germany, Italy, the Netherlands, Portugal, and the UK) from the early 1980s through 2016. Relying on a model of joint household labor supply decisions, we quantitatively analyze the role of non-linear labor income taxes for explaining the evolution of hours worked of married couples over time, using as inputs the full country- and year-specific statutory labor income tax codes. We further evaluate the role of consumption taxes, gender and educational wage premia, and the educational composition. The model is quite successful in replicating the time series behavior of hours worked per employed married woman, with labor income taxes being the key driving force. It does however capture only part of the secular increase in married women's employment rates in the 1980s and early 1990s, suggesting an important role for factors not considered in this paper. An independent and important contribution of the paper is that we make the non-linear tax codes used as an input into the analysis available as a user-friendly and easily integrable set of Matlab codes.

This paper analyzes how the combination of borrowing constraints and idiosyncratic risk affects the equity premium in an overlapping generations economy. I find that introducing a zero-borrowing constraint in an economy without idiosyncratic risk increases the equity premium by 70 percent, which means that the mechanism described in Constantinides, Donaldson, and Mehra (2002) is dampened because of the large number of generations and production. With social security the effect of the zero-borrowing constraint is a lot weaker. More surprisingly, when I introduce idiosyncratic labor income risk in an economy without a zero-borrowing constraint, the equity premium increases by 50 percent, even though the income shocks are independent of aggregate risk and are not permanent. The reason is that idiosyncratic risk makes the endogenous natural borrowing limits much tighter, so that they have a similar effect to an exogenously imposed zero-borrowing constraint. This intuition is confirmed when I add idiosyncratic risk in an economy with a zero-borrowing constraint: neither the equity premium nor the Sharpe ratio change, because the zero-borrowing constraint is already tighter than the natural borrowing limits that result when idiosyncratic risk is added.

This paper examines the relationship between the dispersion of general skills in the working population, and inequality in the distribution of labor income that arises from the market equilibrium from occupational choices. In general, more skilled individuals earn higher labor income in the equilibrium, and the relationship between skills and income is proportional in the occupational group of employees, but labor income increases more than proportionately with skills in the groups of solo self-employed and entrepreneur-managers. Labor income inequality at the economy level is then the result of combining the distribution of skills with the sizes of occupational groups. This paper helps to explain some apparent contradictions between the theory, which predicts a close association between dispersion of skills and labor income inequality, and the empirical evidence, using data from the PIAAC project, of no correlation between dispersion of skills and wage inequality in cross-country data.

Income growth for typical American families has slowed dramatically since 1973. Slower productivity growth and an increase in income inequality have both contributed to this trend. This paper addresses whether there is a relationship between the productivity slowdown and the increase in inequality, specifically exploring the extent to which reduced competition and dynamism can explain both of these phenomena. Productivity growth has been uneven across the economy, with top firms earning increasingly skewed returns. At the same time, the between-firm disparities have been important in explaining the increase in labor income inequality. Both these findings are consistent with the observed reductions in competition, as evidenced by increasing concentration and economic rents, and business dynamism. The authors also explore the scenarios under which government policies can help mitigate, or contribute to, declining competition and dynamism.

Using detailed IRS administrative data on millions of households, we find that households effectively insure against much of the risk facing primary earners. We show that households face less risk than males alone, and households face roughly half the countercyclical risk increase. As a result of these risk differences, household certainty equivalent earnings are 19% higher than for males alone, and household certainty equivalent earnings fall by about half as much during recessions. To facilitate related research, we make available the aggregated data used in our analysis.

We consider the role that workplace attributes play in accounting for the divergence in the careers of women and men, with the onset of parenthood. We exploit matched employer-employee data from Sweden to characterize a model-based index of workplace “family friendliness” and analyze the effect of more family friendly workplaces on the career gaps between mothers and fathers. We find that exogenously moving mothers to more family friendly workplaces would raise their wages and labor income. In contrast, such moves would entail reductions in the same outcomes for fathers, resulting in sizeable improvements in the parental gender gap in wages and income. At the same time, working in more family friendly workplaces would not reduce the penalty to wage rates earned by women with their transition to motherhood (i.e., the motherhood penalty), but it would reduce the motherhood penalty to earned income by facilitating mothers working more hours. Furthermore, the benefits of family friendly workplaces appear to come at the expense of the occupational skill progression of mothers relative to non-mothers, impeding mothers’ ability to climb career ladders over the longer run. Finally, using auxiliary data based on a survey, we find that jobs – as defined by our index – are more substitutable for one another in family friendly workplaces. This substitutability of workers in more family friendly workplaces appears to be the mechanism that facilitates mothers’ ability to balance work and family responsibilities in such workplaces. At the same time, it also may partially explain our finding that more family friendly workplaces slow mothers’ occupational skill-progression.

Labor income earned in Iceland in 1987 went untaxed. I use this episode to study labor supply responses to temporary wage changes. I construct a new population-wide dataset of earnings and working time from pay slips and use two identification strategies to estimate intensive and extensive margin Frisch elasticities of 0.37 and 0.10, respectively. Workers with the ability to adjust drive these average responses: extensive margin responses by young and close-to-retirement cohorts and intensive margin responses by workers in temporally flexible jobs. However, constrained workers take up secondary jobs, which contribute to one-tenth of the overall response. Importantly, married women with children and the wives of men in temporally inflexible jobs respond more strongly than other women do. Within families, wives respond more than do their husbands, who themselves respond negatively to their wives’ tax cuts. This is consistent with substitutability in nonmarket time. Overall, my results suggest that adjustment frictions reduce aggregate labor supply responses to tax cuts and can similarly explain differences in elasticities within and across countries.

Using micro-level panel data and a difference-in-differences identification strategy, we study the effect of political uncertainty on household stock market participation. We find that households significantly reduce their participation and reallocate funds to safer assets during periods of increased political uncertainty prior to gubernatorial elections. The decline in participation is related to households’ response to elevated asset risk and their incentive to hedge increased labor income risk. In situations where uncertainty remains high after elections, pre-election reduction in participation is only partially reversed.

A well established believe in the pension industry is that collective pension funds should take more stock market risk (compared to individual retirement accounts) since risk may be shared with future generations. We extend the OLG model of Gollier (2008) by adding labor income risk in the spirit of Benzoni, Collin-Dufresne, and Goldstein (2007) and show that this idea may be misguided. For the empirical range of parameter values reported by Benzoni et. al., we find that optimal risk-sharing actually implies that collective pension funds should take less stock market risk, not more. If labor income and dividend income are co-integrated, efficient risk-sharing policies should transfer risk from future generations to current generations instead of the other way around. Furthermore, we find that the potential welfare gains from intergenerational risk-sharing are significantly lowered.