The Marginal Cost of Public Funds in OECD Countries; Hours of Work Versus Labor Force Participation

32 Pages Posted: 8 May 2003

See all articles by Henrik Jacobsen Kleven

Henrik Jacobsen Kleven

University of Copenhagen - Economic Policy Research Unit (EPRU)

Claus Thustrup Kreiner

University of Copenhagen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: April 2003

Abstract

A central finding of the modern labor market literature is that labor supply responses tend to be concentrated along the extensive margin (labor force participation) rather than the intensive margin (hours of work). Yet, the literature on the marginal cost of public funds (MCF) focuses solely on the intensive margin. In this paper we demonstrate that it is important to incorporate extensive labor supply responses into the analysis. Firstly, MCF becomes a function of average taxes, rather than just marginal taxes. Secondly, participation decisions and thus MCF depend on the magnitude of transfers for those out of work. Our calculations for 23 OECD countries reveal that the MCF becomes substantially higher once the participation effect is accounted for. This is especially the case for continental European countries where average taxes are high and benefit systems are generous.

JEL Classification: H21, H41, J20

Suggested Citation

Kleven, Henrik Jacobsen and Kreiner, Claus Thustrup, The Marginal Cost of Public Funds in OECD Countries; Hours of Work Versus Labor Force Participation (April 2003). Available at SSRN: https://ssrn.com/abstract=404582

Henrik Jacobsen Kleven

University of Copenhagen - Economic Policy Research Unit (EPRU) ( email )

University of Copenhagen, Building 26
Øster Farimagsgade 5
Copenhagen K., DK-1353
Denmark
+45 35 32 44 15 (Phone)
+45 35 32 30 00 (Fax)

Claus Thustrup Kreiner (Contact Author)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark
+45 35 32 30 20 (Phone)
+45 35 32 30 00 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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