Do taxes explain European employment? Indivisible labor, human capital, lotteries and savings

Lars Ljungqvist, Thomas Sargent

    Research output: Chapter in Book/Report/Conference proceedingChapter

    Abstract

    Adding generous government supplied benefits to Prescott's (2002) model with employment lotteries and private consumption insurance causes employment to implode and prevents the model from matching outcomes observed in Europe. To understand the role of a "not-so-well-known aggregation theory" that Prescott uses to rationalize the high labor supply elasticity that underlies his finding that higher taxes on labor have depressed Europe relative to the United States, this paper compares aggregate outcomes for economies with two arrangements for coping with indivisible labor: (1) employment lotteries plus complete consumption insurance, and (2) individual consumption smoothing via borrowing and lending at a risk-free interest rate. The two arrangements support equivalent outcomes when human capital is not present; when it is present, allocations differ because households' reliance on personal savings in the incomplete markets model constrains the "career choices" that are implicit in their human capital acquisition plans relative to those that can be supported by lotteries and consumption insurance in the complete markets model. Nevertheless, the responses of aggregate outcomes to changes in tax rates are quantitatively similar across the two market structures. Thus, under both aggregation theories, the high disutility that Prescott assigns to labor is an impediment to explaining European nonemployment and benefits levels. Moreover, while the identities of the nonemployed under Prescott's tax hypothesis differ between the two aggregation theories, they all seem counterfactual.

    Original languageEnglish (US)
    Title of host publicationNBER Macroeconomics Annual
    Pages181-224
    Number of pages44
    Volume21
    StatePublished - 2006

    Publication series

    NameNBER Macroeconomics Annual
    Volume21
    ISSN (Print)08893365

    Fingerprint

    Tax
    Savings
    Human capital
    Indivisible labor
    Consumption insurance
    Lottery
    Labor
    Market model
    Government
    Private consumption
    Lending
    Consumption smoothing
    Borrowing
    Impediments
    Career choice
    Market structure
    Household
    Interest rates
    Personal saving
    Labor supply elasticity

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Ljungqvist, L., & Sargent, T. (2006). Do taxes explain European employment? Indivisible labor, human capital, lotteries and savings. In NBER Macroeconomics Annual (Vol. 21, pp. 181-224). (NBER Macroeconomics Annual; Vol. 21).

    Do taxes explain European employment? Indivisible labor, human capital, lotteries and savings. / Ljungqvist, Lars; Sargent, Thomas.

    NBER Macroeconomics Annual. Vol. 21 2006. p. 181-224 (NBER Macroeconomics Annual; Vol. 21).

    Research output: Chapter in Book/Report/Conference proceedingChapter

    Ljungqvist, L & Sargent, T 2006, Do taxes explain European employment? Indivisible labor, human capital, lotteries and savings. in NBER Macroeconomics Annual. vol. 21, NBER Macroeconomics Annual, vol. 21, pp. 181-224.
    Ljungqvist L, Sargent T. Do taxes explain European employment? Indivisible labor, human capital, lotteries and savings. In NBER Macroeconomics Annual. Vol. 21. 2006. p. 181-224. (NBER Macroeconomics Annual).
    Ljungqvist, Lars ; Sargent, Thomas. / Do taxes explain European employment? Indivisible labor, human capital, lotteries and savings. NBER Macroeconomics Annual. Vol. 21 2006. pp. 181-224 (NBER Macroeconomics Annual).
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