Program > Papers by author > Fuest Clemens

Tuesday 13
C6 - Macroeconomics, Growth II
Chair: Jean-Bernard Chatelain
› 9:50 - 10:15 (25min)
› Room 104 - B. Bartok
Automatic Stabilization and Labor Supply
Mathias Dolls  1@  , Clemens Fuest  2@  , Andreas Peichl  1@  , Christian Wittneben  1, 3@  
1 : Centre for European Economic Research  (ZEW Mannheim)
2 : ifo Institut – Leibniz-Institut für Wirtschaftsforschung an der Universität München e.V.  (ifo Institut)
3 : Zentrum für europäische Wirtschaftsforschung  (ZEW Mannheim)  -  Website
Zentrum für Europäische Wirtschaftsforschung GmbH (ZEW) L 7, 1 68161 Mannheim -  Germany

This paper estimates the stabilizing effects of tax and transfers systems through a
marginal incentives channel. When income taxes are progressive, the tax rate that a
household faces will fall following an income decline in a recession, thereby increasing
work incentives and hence labor supply. This effect offsets part of the initial income
decline, stabilizing aggregate income and output. The magnitude of the effect depends
on the change in the marginal tax rate after a change in gross income, as well as the
elasticity of labor supply with respect to a change in the after-tax wage.
We estimate a structural discrete choice labor supply model and individual tax
rates for households in the EU28 using the microsimulation model EUROMOD and
EU-SILC household data. Our estimations show that up to ten percent of a fall in
household income is offset by an increase in labor supply. The EU average is roughly
two percent. The results reveal a large heterogeneity across countries, which is mainly
due to differences in the progressivity of the tax systems across Europe: the incentive
effect is large in countries with a highly progressive tax schedule, while it is zero for
countries with a flat tax, where the marginal tax rate is constant. Differences in labor
supply elasticities also play a significant role.

  • Other
Online user: 1