Heterogeneity, Transfer Progressivity, and Business Cycles
61 Pages Posted: 25 Jan 2023
Date Written: January 7, 2023
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: Suggested Citation