Publication Type
Journal Article
Version
acceptedVersion
Publication Date
4-2014
Abstract
The Prescott hypothesis that permanently higher marginal tax rates on labour income fully explain the decline in market hours worked in Europe (relative to North America) over three decades is subject to a theoretical investigation. The Prescott model consists of isolated economies that are not linked by international capital mobility or international exchange of goods. We study a two-country model with free international capital mobility. We find that imposing higher marginal labour tax rates in one country leads to international capital inflows into that country, which acts to counteract the negative employment effect of higher taxes. Market hours worked in the low marginal labour tax rate country fall with an increase in its net foreign assets. With identical preferences, total market hours worked are equalized across the two countries. With factor price equalization, the international equalization of hours worked result still holds with goods trade substituting for international capital mobility.
Discipline
Labor Economics
Research Areas
Applied Microeconomics
Publication
Oxford Economic Papers
Volume
66
Issue
2
First Page
516
Last Page
532
ISSN
0030-7653
Identifier
10.1093/oep/gpt023
Publisher
Oxford University Press
Citation
HOON, Hian Teck.
Effects of labour taxes on hours of market and home work: The role of international capital mobility and trade. (2014). Oxford Economic Papers. 66, (2), 516-532.
Available at: https://ink.library.smu.edu.sg/soe_research/2337
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1093/oep/gpt023