Research

We study the role of firm and worker level shocks for individual labor earnings dynamics. A key feature of the distribution of earnings changes is excess kurtosis, with substantial earnings changes for a significant proportion of workers. Using Danish matched employer-employee data, we show that large worker earnings changes occur along the entire firm revenue growth distribution but more frequently in the tails. In particular, large earnings losses are more likely in shrinking firms due to more employment separations and wage losses of stayers. We interpret the evidence through the lens of an equilibrium search model with two-sided heterogeneity. The model reveals that while worker shocks account for the majority of earnings fluctuations, firm shocks are important for generating endogenous separations and large wage losses for stayers. Finally, the model implies significant endogenous responses of earnings dynamics to policy changes aiming to insure workers directly or indirectly through firms.

We study the optimal design of means-tested transfers and progressive income taxes. In a simple analytical model, we show that adding a transfer to a log-linear tax induces welfare gains almost as large as in the second-best allocation. Transfers allow for more progressive average than marginal tax-and-transfer rates, achieving redistribution while preserving efficiency. In a rich dynamic model, we quantify the optimal fiscal plan. We use new flexible functions featuring targeted transfers and progressive income taxes, delivering a good empirical fit across the income distribution. Transfers should be larger than currently in the U.S. and financed with moderate income-tax progressivity.

This paper provides novel evidence that the added worker effect – labor force entry upon spousal job loss – is substantially stronger for young than old households. Using a life cycle model of two-member households in a frictional labor market, we study whether this age-dependency is driven by heterogeneous needs for or availability of spousal insurance. Our framework endogenizes asset and human capital accumulation, as well as arrival rates of job offers, and is diciplined against US micro data. By means of counterfactuals, we find a strong complementarity across both margins: A large added worker effect requires both high spousal earnings potential (human capital) relative to the primary earner and limited access to other means of self insurance (assets). Either one individually does not generate a sizable response of spousal labor supply to the job loss of a primary earner, but their interaction can account for the observed age differential in the added worker effect.

Over the last decades, the U.S. has experienced a large increase in both income inequality and the standard of living. The workhorse models of optimal income taxation call for a more redistributive welfare state as inequality rises. By contrast, the standard of living plays no role for optimal taxes in these homothetic environments. To address this shortcoming, this paper incorporates non-homothetic preferences into the optimal income tax problem. In a Mirrlees setup, we characterize how the rising standard of living alters both sides of the equity-efficiency trade-off. As an economy becomes richer, non-homotheticities imply a fall in the dispersion of marginal utilities which weakens equity concerns but has ambiguous effects on efficiency concerns. In a dynamic incomplete market setup calibrated to the U.S. in 1950 and 2010, we quantify this new channel. We find that the rising standard of living dampens by at least 25% the desired increase in redistribution due to rising inequality.