Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/76382 
Year of Publication: 
2003
Series/Report no.: 
CESifo Working Paper No. 935
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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 e.ect is accounted for. This is especially the case for continental European countries where average taxes are high and benefit systems are generous.
Document Type: 
Working Paper
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