Friday, October 5, 2012

Marginal Tax Rates by Age

Dean Baker claims today that the labor market experience of young people refutes my finding that redistribution is the single largest factor depressing the labor market since 2007. In doing so, he gets some of the facts wrong and neglects several economically important connections between redistribution and the labor market.

  1. I explain in The Redistribution Recession that, among household heads and spouses, safety net expansions did more to erode work incentives among young people than they did among middle-aged and elderly people because young people have wages that are relatively low compared to (a) the dollar amount added to safety net benefits, (b) the dollar amount of their unsecured student loan and other debt, and (c) the cumulative dollar amount of the three minimum wage hikes (Dr. Baker thinks that minimum wages don't affect employment among young people, but he's wrong about that too).  A $400 per month food stamp benefit is not considered small change to a person who was earning the pre-recession minimum wage of $5.15 -- they'd have to work over 80 hours to make that much after taxes.
  2. Redistribution affects labor demand too. Measured in terms of marginal tax rates, these effects are also larger for young people than for middle-aged people because young people are less productive. For example, if employers perceive a new unemployment-insurance-fund expense associated with each employee that was 3% of what middle-aged employees produce, and middle-aged employees are twice as productive, then the perceived expense would be 6% of what a young employee produces.
  3. Even if marginal tax rates had increased the same amount for young people as for every one else, labor economists believe that young people are more sensitive to incentives because they are not settled into an occupation (e.g., they could stay in, or go back to, school), do not have older (more expensive) children, etc.  In other words, a uniform increase in marginal tax rates need not create the same behavioral change for all groups.
  4. Dean Baker is confident that young people compete with middle-aged people in the labor market, so that a depressed labor market for middle-aged people would mean a boom for young people.  More work is needed on this issue (I treat it briefly in Chapter 5 of the Redistribution Recession), but I suspect the opposite: that the young and middle-aged are complements in production: young workers are not very helpful without more experienced people to supervise and train them, and otherwise be part of the larger production teams that are prevalent in our economy. A related phenomenon: young people are especially likely to work in restaurants or as babysitters, but when the middle-aged labor market is depressed middle-aged people will sometimes do their own cooking and childcare rather than hiring young people to do it.
  5. My book notes, even embraces, the fact that part of the depression of our labor market is not because of safety net expansions or other marginal tax rate increases.  But that is small part (my best estimate: 25% of the total depression, even while it is 95+% of the academic and public policy discussion), and is not dominant in the aggregate data.  As with any small effect, you might see it better if you zoom in on the right group.
  6. Most of my marginal tax rate work so far has pertained to household heads and spouses.  I would be happy if other economists, even Dr. Baker, would compute marginal tax rate series for teenagers and other potential workers who are not heads of their household, so we could see what lessons might emerge.

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