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How Fiscal Policies Reduce Labor Force Participation In Open Economies: Evidence On Tax Competition And Compensation Hypotheses

Author

Listed:
  • Stacie Beck

    (Department of Economics, University of Delaware)

  • Soodong Park

Abstract

The tax competition hypothesis is that market integration places downward pressure on capital taxes and social expenditures. The compensation hypothesis asserts that market integration results in increased social expenditures and higher tax burdens. Using panel data over 1980-2012 from 26 OECD countries, we found evidence of their coexistence and interaction. We find that the negative effects of social spending and tax policy on labor force participation are heightened in open economies, with a stronger impact from compensative social expenditures. Increased social expenditures reduce labor force participation directly and also indirectly through a higher labor tax burden.

Suggested Citation

  • Stacie Beck & Soodong Park, 2014. "How Fiscal Policies Reduce Labor Force Participation In Open Economies: Evidence On Tax Competition And Compensation Hypotheses," Working Papers 14-16, University of Delaware, Department of Economics.
    • Handle: RePEc:dlw:wpaper:14-16
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    References listed on IDEAS

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    More about this item

    Keywords

    fiscal policy; open economy; labor force participation; tax competition; compensation hypothesis; panel VAR;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • F68 - International Economics - - Economic Impacts of Globalization - - - Policy

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