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’s financial resources and the child’s 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