Heterogeneity, Transfer Progressivity, and Business Cycles

Youngsoo Jang, Takeki Sunakawa and Minchul Yum

No 17848, CEPR Discussion Papers from Centre for Economic Policy Research

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; Business cycles; Redistributive policies (search for similar items in EconPapers)
JEL-codes: E21 E24 E32 H31 H53 (search for similar items in EconPapers)
Date: 2023-01
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Working Paper: Heterogeneity, Transfer Progressivity and Business Cycles (2020)
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