Taxation, credit frictions and the cyclical behavior of the labor wedge

Salem Abo-Zaid

Empirical Economics, 2021, vol. 60, issue 4, No 7, 1777-1816

Abstract: Abstract Labor-income and consumption taxes are often referred to as the primary causes of the labor wedge and differences in hours worked across countries. While this can be potentially true in the long run, its premise for explaining the cyclical behavior of the labor wedge is questionable. Using US data over 1955–2019, this paper first studies whether taxation explains the cyclical behavior of the labor wedge. It is shown that the tax wedge, which combines both types of taxes, fails in accounting for the countercyclicality of the labor wedge. I then study other factors that may raise the labor wedge during recessions, such as credit frictions on the firms’ side and price markups, and find that credit frictions are the primary reasons for this behavior. The empirical findings are consistent with the model-based results; the model with credit frictions successfully generates a countercyclical behavior of the labor wedge, whereas the model without credit frictions does not.

Keywords: Labor wedge; Credit frictions; Tax wedge; Business cycles (search for similar items in EconPapers)
JEL-codes: E24 E32 E44 H30 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s00181-020-01890-8 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:empeco:v:60:y:2021:i:4:d:10.1007_s00181-020-01890-8

Ordering information: This journal article can be ordered from
http://www.springer. ... rics/journal/181/PS2

DOI: 10.1007/s00181-020-01890-8

Access Statistics for this article

Empirical Economics is currently edited by Robert M. Kunst, Arthur H.O. van Soest, Bertrand Candelon, Subal C. Kumbhakar and Joakim Westerlund

More articles in Empirical Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().