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

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1093/oep/gpt023

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