Heterogeneity, Transfer Progressivity, and Business Cycles

61 Pages Posted: 25 Jan 2023

See all articles by Youngsoo Jang

Youngsoo Jang

University of Queensland - School of Economics

Takeki Sunakawa

Hitotsubashi University - Graduate School of Economics

Minchul Yum

University of Southampton; CEPR

Date Written: January 7, 2023

Abstract

This paper studies how transfer progressivity influences aggregate fluctuations when interacting with household heterogeneity. Using a simple static model of the extensive margin labor supply, we analytically characterize how transfer progressivity influences differential labor supply responses to aggregate conditions across heterogeneous households. We then build a quantitative dynamic general equilibrium model with both idiosyncratic and aggregate productivity shocks and show that it delivers moderately procyclical average labor productivity and a large cyclical volatility of aggregate hours relative to output. A counterfactual exercise shows that higher progressivity achieved by a faster phase-out of transfers would strengthen our mechanism. Finally, we provide suggestive empirical evidence on the heterogeneity of employment responses across the wage distribution.

Keywords: Progressivity, targeted transfers, extensive margin labor supply, business cycles, redistributive policies

JEL Classification: E32, E24, H31, H53, E21

Suggested Citation

Jang, Youngsoo and Sunakawa, Takeki and Yum, Minchul, Heterogeneity, Transfer Progressivity, and Business Cycles (January 7, 2023). Available at SSRN: https://ssrn.com/abstract=4335862 or http://dx.doi.org/10.2139/ssrn.4335862

Youngsoo Jang

University of Queensland - School of Economics ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Takeki Sunakawa

Hitotsubashi University - Graduate School of Economics ( email )

Naka 2-1
Kunitachi, Tokyo 186-8601
Japan

Minchul Yum (Contact Author)

University of Southampton ( email )

Southampton
United Kingdom

CEPR ( email )

London
United Kingdom

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