Effects of Labor Taxes on Hours of Market and Home Work: The Role of International Capital Mobility and Trade

Hian Hoon

No 05-2010, Working Papers from Singapore Management University, School of Economics

Abstract: This paper evaluates the Prescott (2004) hypothesis that permanently higher payroll taxes fully explain the decline in number of market hours worked in Europe (relative to America) over three decades. The Prescott model made assumptions that, in steady state, left out any incentive for either international capital mobility or international exchange of goods. We study a one-good model where the imposition of higher payroll taxes in one region leads to higher domestic real interest rate in that region. As a result, there are incentives for international capital outflows into the high payroll tax region with the consequence that number of market hours worked in the low payroll tax region also decline. With identical tastes and rate of time discount across the two regions, we find that the number of hours worked in the market, home work, and leisure are equalized across the two regions. In the multi-good model, when factor price equalization holds so free trade acts as a substitute for factor mobility, we show that there is also equalization of market work, home work, and leisure across the two regions.

Keywords: Payroll taxes; wealth decumulation; capital mobility (search for similar items in EconPapers)
JEL-codes: E13 E22 E24 F11 F16 F21 H20 (search for similar items in EconPapers)
Date: 2010-04
New Economics Papers: this item is included in nep-ifn and nep-sea
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Published in SMU Economics and Statistics Working Paper Series

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Related works:
Journal Article: Effects of labour taxes on hours of market and home work: the role of international capital mobility and trade (2014)
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