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Does Redistribution Increase Output? The Centrality of Labor Supply

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Abstract

The aftermath of the recent recession has seen numerous calls to use transfers to poorer households as a means to enhance aggregate activity. We show that the key to understanding the direction and size of such interventions lies in labor supply decisions. We study the aggregate impact of short-term redistributive economic policy in a standard incomplete-markets model. We characterize analytically conditions under which redistribution leads to an increase or decrease in effective hours worked, and hence, output. We then show that under the parameterization that matches the wealth distribution in the U.S. economy (Castaneda et al., 2003), wealth redistribution leads to a boom in consumption, but not in output.

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  • Kartik B. Athreya & Andrew Owens & Felipe Schwartzman, 2014. "Does Redistribution Increase Output? The Centrality of Labor Supply," Working Paper 14-4, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:14-04
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    9. Alisdair McKay & Ricardo Reis, 2016. "The Role of Automatic Stabilizers in the U.S. Business Cycle," Econometrica, Econometric Society, vol. 84, pages 141-194, January.
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    11. Alonso-Ortiz, Jorge & Rogerson, Richard, 2010. "Taxes, transfers and employment in an incomplete markets model," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 949-958, November.
    12. J. Stephen Ferris, 2013. "Fiscal policy," Chapters, in: William F. Shughart II & Laura Razzolini & Michael Reksulak (ed.), The Elgar Companion to Public Choice, Second Edition, chapter 16, pages 260-283, Edward Elgar Publishing.
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    1. Does Redistribution Increase Output? The Centrality of Labor Supply
      by Christian Zimmermann in NEP-DGE blog on 2014-05-08 19:26:59

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    Cited by:

    1. Krueger, D. & Mitman, K. & Perri, F., 2016. "Macroeconomics and Household Heterogeneity," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 843-921, Elsevier.
    2. Neil R. Mehrotra, 2018. "Fiscal Policy Stabilization: Purchases or Transfers?," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 1-50, March.
    3. Hubert, Paul & Savignac, Frederique, 2023. "Monetary Policy and Labor Income Inequality: the Role of Extensive and Intensive Margins," CEPR Discussion Papers 18130, C.E.P.R. Discussion Papers.
    4. Ciminelli, Gabriele & Ernst, Ekkehard & Merola, Rossana & Giuliodori, Massimo, 2019. "The composition effects of tax-based consolidation on income inequality," European Journal of Political Economy, Elsevier, vol. 57(C), pages 107-124.
    5. Giambattista, Eric & Pennings, Steven, 2017. "When is the government transfer multiplier large?," European Economic Review, Elsevier, vol. 100(C), pages 525-543.
    6. Alisdair McKay & Ricardo Reis, 2016. "The Role of Automatic Stabilizers in the U.S. Business Cycle," Econometrica, Econometric Society, vol. 84, pages 141-194, January.
    7. Matthew Rognlie & Adrien Auclert, 2016. "Inequality and Aggregate Demand," 2016 Meeting Papers 1353, Society for Economic Dynamics.
    8. Cantore, Cristiano & Ferroni, Filippo & Mumtaz, Hroon & Theophilopoulou, Angeliki, 2022. "A tail of labour supply and a tale of monetary policy," Bank of England working papers 989, Bank of England.
    9. Pedro Brinca & Hans Holter & Miguel Faria-e-Castro & Miguel Ferreira, 2019. "The Nonlinear Effects of Fiscal Policy," 2019 Meeting Papers 934, Society for Economic Dynamics.
    10. Giambattista,Eric & Pennings,Steven Michael, 2017. "When is the government transfer multiplier large ?," Policy Research Working Paper Series 8184, The World Bank.

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    More about this item

    Keywords

    Multipliers; Redistribution; Labor supply; Idiosyncratic Risk;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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