Comparing inequality aversion across countries when labor supply responses differ

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu We analyze to which extent social inequality aversion differs across nations when controlling for actual country differences in labor supply responses. Towards this aim, we estimate labor supply elasticities at both extensive and intensive margins for 17 EU countries and the US. Using the same data, inequality aversion is measured as the degree of redistribution implicit in current tax-benefit systems, when these systems are deemed optimal. We find relatively small differences in labor supply elasticities across countries. However, this changes the cross-country ranking in inequality aversion compared to scenarios following the standard approach of using uniform elasticities. Differences in redistributive views are significant between three groups of nations. Labor supply responses are systematically larger at the extensive margin and often larger for the lowest earnings groups, exacerbating the implicit Rawlsian views for countries with traditional social assistance programs. Given the possibility that labor supply responsiveness was underestimated at the time these programs were implemented, we show that such wrong perceptions would lead to less pronounced and much more similar levels of inequality aversion. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E SJEL Classification: H11, H21, D63, C63

Redistributive Politics and the Tyranny of the Middle Class

“…Bargain and Keane (2011) calculate social welfare weights for Ireland and the UK at different points in time, ranging from 1987 to 2005. Bargain et al (2014) conduct a similar analysis for singles in 17 European countries. Lockwood and Weinzierl (2016) study the evolution of welfare weights in the US over the period 1979.…”

Political preferences for redistribution in Sweden

“…The weight on welfare recipients is the mirror image of the weights on workers, adjusting for variations in the proportion of workers and non-workers over time. 29 This is consistent with Bargain et al (2014a) and Spadaro et al (2015), but less pronounced in Spadaro et al 1970s and '80s, the weight on the non-employed is substantially higher than the weight on low-income workers. Also during the 1990s and 2000s, the weight on non-workers seems high.…”

“…At the extensive margin, the elasticities are 0.15 and 0.14, respectively. 4 Spadaro et al (2015) is a study methodologically similar to Bargain et al (2014a) in the sense that they use a discrete optimal income tax framework in the spirit of Saez (2002). In contrast to Bargain et al, but in similarity to our paper, they use exogenous elasticities from the literature.…”

“…As evident from the figure, the implied elasticities range between 0.03 and 0.16, which belong to the lower end of the estimates reported in the literature. 32 32 The finding of a negative social welfare weight at the top is in contrast to Bargain et al (2014a). This can potentially be explained by the fact that they estimate a low intensive margin elasticity for the top quintile, their exclusion of consumption taxation, resulting in lower top effective tax rates, or, because of differences between their top quintile and the asymptotic income level associated with our continuous optimal tax framework.…”

“…5 While the above-mentioned papers focus on analyzing redistributive preferences at a specific point 3 We also calculate Pareto parameters in order to conduct an asymptotic analysis of top income taxation. From a methodological point of view, Bargain et al (2014a) employ a discrete rather than continuous optimal income tax model and structurally estimate labor supply elasticities on the same dataset that they use to calculate social welfare weights. In contrast, we employ elasticities from the literature that have been obtained from various sources and different empirical approaches.…”