The Optimal Distribution of the Tax Burden over the Business Cycle

This paper analyses optimal income taxes over the business cycle under a balanced-budget restriction, for low, middle and high income households. A model incorporating capital-skill complementarity in production and differential access to capital and labour markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We .nd that the tax rate for high income agents is optimally the least volatile and the tax rate for low income agents the least countercyclical. In contrast, the path of optimal taxes for the middle income group is found to be very volatile and counter-cyclical. We further find that the optimal response to output-enhancing capital equipment technology and spending cuts is to increase the progressivity of income taxes. Finally, in response to positive TFP shocks, taxation becomes more progressive after about two years.

Countercyclical Fiscal Policy and Cyclical Factor Utilization

In a neoclassical growth model with monopolistic competition in the product market, the presence of cyclical factor utilization enhances the stabilization role of countercyclical taxes. The costs of varying capital utilization take the form of varying rates of depreciation, which in turn have amplifying effect on investment decisions as well as the volatility of most aggregate variables. This creates an additional channel through which taxes affect the economy, a channel that enhances the stabilization role of countercyclical taxes, with particularly strong effects in the labor market. However, in terms of welfare, countercyclical taxes are welfare inferior due to reduced precautionary saving motives.

The Effect of Activity-Based Payment on Dentists’ Activity: Evidence from a Natural Experiment in the UK National Health Service

The extent to which remuneration systems affect the behaviour of health care professionals is of considerable importance in the administration of publicly funded heath care systems. Using data across two jurisdictions in the United Kingdom, in only one of which remuneration was changed, we compare the extent of measured dental activity at the dentist level in order to ascertain the impact of moving to activity-based remuneration. We find that there are large and statistically significant increases in activity as dentists moved to the activity-based system and that a dentist’s previous form of contract is an important determinant of the magnitude of the effect. We also explore the extent to which dentists’ professional attitudes can explain differences in their activity and find that some aspects of self-reported attitudes are associated with observable differences in activity.

Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty

The paper studies the interaction between cyclical uncertainty and investment in a stochastic real option framework where demand shifts stochastically between three different states, each with different rates of drift and volatility. In our setting the shifts are governed by a three-state Markov switching model with constant transition probabilities. The magnitude of the link between cyclical uncertainty and investment is quantified using simulations of the model. The chief implication of the model is that recessions and financial turmoil are important catalysts for waiting. In other words, our model shows that macroeconomic risk acts as an important deterrent to investments.

How Heavy Is A Job?: A Critical Survey of Job Evaluation as a Payment Device.

With salaries subjected to scrutiny more than ever, it is increasingly important that the process by which they are determined be understood and justifiable. Both public and private organisations now routinely rely on so-called “job evaluation” as a means of constructing an appropriate pay-scale and as such it is ever more necessary that we appreciate how this system works and that we recognise its limits. Only with such an understanding of the way in which salaries are set can we hope to have a meaningful discussion of their economic function. This paper aims to expound the details of job evaluation both in theory and in practice, and critically assess its shortcomings. In Section 1 below we describe the job evaluation system and in Section 2 we briefly outline the history and the usage of the system in both the private and the public sector. In Section 3 we theoretically analyse the often unstated but nonetheless implicit assumptions made by practitioners of the art of job evaluation. Section 4 applies the analysis of Section 3 to review a particular and important case study, namely The Senior Salaries Review of the Welsh Assembly 2004. Section 5 concludes.

Cyclical and Welfare Effects of Public Sector Unions in a Real-Business-Cycle Model

Motivated by the highly-unionized public sectors, the high public shares in total employment, and the public sector wage premia observed in Europe, this paper examines the importance of public sector unions for macroeconomic theory. The model generates cyclical behavior in hours and wages that is consistent with data behavior in an economy with highly-unionized public sector, namely Germany during the period 1970-2007. The union model is a signifi cant improvement over a model with exogenous public employment. In addition, endogenously-determined public wage and hours add to the distortionary e ffect of contractionary tax reforms by generating greater tax rate changes, thus producing signi ficantly higher welfare losses.

Monetary and Fiscal Policy under Deep Habits

Recent work on optimal policy in sticky price models suggests that demand management through fiscal policy adds little to optimal monetary policy. We explore this consensus assignment in an economy subject to ‘deep’ habits at the level of individual goods where the counter-cyclicality of mark-ups this implies can result in government spending crowding-in private consumption in the short run. We explore the robustness of this mechanism to the existence of price discrimination in the supply of goods to the public and private sectors. We then describe optimal monetary and fiscal policy in our New Keynesian economy subject to the additional externality of deep habits and explore the ability of simple (but potentially nonlinear) policy rules to mimic fully optimal policy.

A Producer Theory with Business Risks

In this paper, we consider a producer who faces uninsurable business risks due to incomplete spanning of asset markets over stochastic goods market outcomes, and examine how the presence of the uninsurable business risks affects the producer's optimal pricing and production behaviours. Three key (inter-related) results we find are: (1) optimal prices in goods markets comprise ‘markup’ to the extent of market power and ‘premium’ by shadow price of the risks; (2) price inertia as we observe in data can be explained by a joint work of risk neutralization motive and marginal cost equalization condition; (3) the relative responsiveness of risk neutralization motive and marginal cost equalization at optimum is central to the cyclical variation of markups, providing a consistent explanation for procyclical and countercyclical movements. By these results, the proposed theory of producer leaves important implications both micro and macro, and both empirical and theoretical.

Unionisation, International Integration and Selection

We study how unionisation affects competitive selection between heterogeneous firms when wage negotiations can occur at the rm or at the profit-centre level. With productivity specific wages, an increase in union power has: (i) a selection-softening; (ii) a counter-competitive; (iii) a wage-inequality; and (iv) a variety effect. In a two-country asymmetric setting, stronger unions soften competition for domestic firms and toughen it for exporters. With profit-centre bargaining, we show how trade liberalisation can affect wage inequality among identical workers both across firms (via its effects on competitive selection) and within firms (via wage discrimination across destination markets).

Unionism and Peer-Referencing

This study assesses the 'fair-wage-effort' hypothesis, by examining (a) the relationship between relative wage comparisons and job satisfaction and quitting intensions, and (b) the relative ranking of stated effort inducing-incentives, in a novel dataset of unionised and non-unionised European employees. By distinguishing between downward and upward-looking wage comparisons, it is shown that wage comparisons to similar workers exert an asymmetric impact on the job satisfaction of union workers, a pattern consistent with inequity-aversion and conformism to the reference point. Moreover, union workers evaluate peer observation and good industrial relations more highly than payment and other incentives. In contrast, non-union workers are found to be more status-seeking in their satisfaction responses and less dependent on their peers in their effort choices The results are robust to endogenous union membership, considerations of generic loss aversion and across different tenure profiles. They are supportive of the individual egalitarian bias of collective wage determination and self-enforcing effort norms.

News Shocks and Business Cycles: Bridging the Gap from Different Methodologies

An important disconnect in the news driven view of the business cycle formalized by Beaudry and Portier (2004), is the lack of agreement between different—VAR and DSGE—methodologies over the empirical plausibility of this view. We argue that this disconnect can be largely resolved once we augment a standard DSGE model with a financial channel that provides amplification to news shocks. Both methodologies suggest news shocks to the future growth prospects of the economy to be significant drivers of U.S. business cycles in the post-Greenspan era (1990-2011), explaining as much as 50% of the forecast error variance in hours worked in cyclical frequencies

Policy Labels and Investment Decision-making

Much attention in recent years has turned to the potential of behavioural insights to improve the performance of government policy. One behavioural concept of interest is the effect of a cash transfer label on how the transfer is spent. The Winter Fuel Payment (WFP) is a labelled cash transfer to offset the costs of keeping older households warm in the winter. Previous research has shown that households spend a higher proportion of the WFP on energy expenditures due to its label (Beatty et al., 2011). If households interpret the WFP as money for their energy bills, it may reduce their willingness to undertake investments which help achieving the same goal, such as the adoption of renewable energy technologies. In this paper we show that the WFP has distortionary effects on the renewable technology market. Using the sharp eligibility criteria of the WFP in a Regression Discontinuity Design, this analysis finds a reduction in the propensity to install renewable energy technologies of around 2.7 percentage points due to the WFP. This is a considerable number. It implies that 62% of households (whose oldest member turns 60) would have invested in renewable energy but refrain to do so after receiving the WFP. This analysis suggests that the labelling effect spreads to products related to the labelled good. In this case, households use too much energy from sources which generate pollution and too little from relatively cleaner technologies.

Tax smoothing in a business cycle model with capital-skill complementarity

This paper undertakes a normative investigation of the quantitative properties of optimal tax smoothing in a business cycle model with state contingent debt, capital-skill complementarity, endogenous skill formation and stochastic shocks to public consumption as well as total factor and capital equipment productivity. Our main finding is that an empirically relevant restriction which does not allow the relative supply of skilled labour to adjust in response to aggregate shocks, signi cantly changes the cyclical properties of optimal labour taxes. Under a restricted relative skill supply, the government fi nds it optimal to adjust labour income tax rates so that the average net returns to skilled and unskilled labour hours exhibit the same dynamic behaviour as under fl exible skill supply.

Unemployment and Endogenous Reallocation over the Business Cycle

This paper studies unemployed workers’ decisions to change occupations, and their impact on fluctuations in aggregate unemployment and its underlying duration distribution. We develop an analytically and computationally tractable stochastic equilibrium model with heterogenous labor markets. In this model three different types of unemployment arise: search, rest and reallocation unemployment. We document new evidence on unemployed workers’ gross occupational mobility and use it to calibrate the model. We show that rest unemployment is the main driver of unemployment fluctuations over the business cycle and causes cyclical unemployment to be highly volatile. The resulting unemployment duration distribution generated by the model responds realistically to the business cycle, creating substantial longer-term unemployment in downturns. Finally, rest unemployment also makes our model simultaneously consistent with procyclical occupational mobility of the unemployed, countercyclical job separations into unemployment and a negatively-sloped Beveridge curve.

Unionisation, International Integration and Selection

We study how unionisation affects competitive selection between heterogeneous firms when wage negotiations can occur at the firm or at the profit-centre level. With productivity specific wages, an increase in union power has: (i) a selection-softening; (ii) a counter-competitive; (iii) a wage-inequality; and (iv) a variety effect. In a two-country asymmetric setting, stronger unions soften competition for domestic firms and toughen it for exporters. With profit-centre bargaining, we show how trade liberalisation can affect wage inequality among identical workers both across firms (via its effects on competitive selection) and within firms (via wage discrimination across destination markets).