Without holding either a Nobel, a John Bates Clark, a chair in Economics or even a PhD in Economics for that matter (yet!- working hard to finish my thesis soon), I will adventure to state that I am inclined to agree with the argument put forward in a recent post by Greg Mankiw (which is also Ed Prescotts's position, but not so much David Card's). And not only because I am currently located in Denmark, which happens to be, I'd say, one close-to-perfect illustration for Mankiw's "pure" substitution case.
The labour market features of this Scandinavian country make it in fact quite a good term of comparison to the USA in this context (relative to the rest of the continental EU), given that the DK labour market is very flexible in terms of labour mobility (tenure-specific turnover does not fall below 12% of all employment per year, that figure is more than 50% for less than 1 year of seniority! ), while at the same time the DK welfare system is one of the most extensive and "evolved" of its kind. Inter alia, social benefits and health care are (generally) freely available for residents and largely funded by taxes. Let us see how general is "general": 98% of the Danish population is covered by the publicly funded national health insurance, only 2% are under a health insurance scheme where they pay the costs themselves (the advantage of this latter category is materialized in the fact that they do not need to be referred by a general practioner when they wish to see a specialist). Many other social benefits such as day-care for children etc. are offered freely and are tax funded, as well. It is therefore the case in Denmark that the largest chunk of the tax revenue is rebated lump-sum to the taxpayers, hence essentially only the substitution effect would remain, as Mankiw argues. And as he concludes, the implication would be that "the effect of high taxes on the quantity of labor supplied is larger."
Update: This is the original paper of Prescott from July 2004 referred to by Card and Mankiw (where all data sources are mentioned - most of them are readily accesible online, see for instance the OECD Labour Force Statistics Data).
4 comments:
There's a downside to unemployment insurance after all, it seems. In search models an increase in the size of the unemployment benefit leads to a higher reservation wage.
We can look at this from either a "[labor] supplier's recalcitrance" or from a labor demand rigidity point of view.
The discussion from Mankiw's site deals mostly with labor supply. But some of the story must come from labor demand... e.g. the marginal tax rate for corporations in Italy is close to 80-85, even 90 eurocents for many companies. And if you add firing/hiring regulation... the picture is clear.
Gabriel, there's some confusion between your lines. I will not get into details but simply point out that: I never mentioned unemployment insurance per se; I gave the example of DK exactly because of the flexibility in the labor market (null firing costs) corroborated with the extensive welfare system. Food for thought. BTW, see also many of the comments to Mankiw's original post which might tackle some more of your concerns.
But keep going, nice to meet you and get your comments, by the way.
Yes. Prescott's point is 100% about tax rates. I was trying to discuss unemployment in Europe from various perspectives. It's my fault, I should have been clearer.
It's not so much that, I got that. I basically chose my example to start with so that we can judge the example in from a labour supply perspective, alone. Naturally, this is not fully realistic, but to a great extent is (relative to most other settings you would think of). There are other issues with DK that make it less of a perfect example, of course, but I leave that up to you to point out :-).
A separate but related note: in my opinion many economists nowadays are simply too fast (and negligent by doing that) in dismissing the supply side economics implications. In fact Mankiw comes back on the theme later, but I did not follow on that any longer on my blog.
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