The marginal cost of public funds: Hours of work versus labor force participation

Henrik Jacobsen Kleven, Claus Thustrup Kreiner

Research output: Contribution to journalArticlepeer-review

113 Scopus citations

Abstract

This paper extends the theory and measurement of the marginal cost of public funds (MCF) to account for labor force participation responses. Our work is motivated by the emerging consensus in the empirical literature that extensive (participation) responses are more important than intensive (hours of work) responses. In the modelling of extensive responses, we argue that it is crucial to account for the presence of non-convexities created by fixed work costs. In a non-convex framework, tax and transfer reforms give rise to discrete participation responses generating first-order effects on government revenue. These revenue effects make the marginal cost of funds higher and we show numerically that the implications for MCF tend to be substantial.

Original languageEnglish (US)
Pages (from-to)1955-1973
Number of pages19
JournalJournal of Public Economics
Volume90
Issue number10-11
DOIs
StatePublished - Nov 2006
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Labor supply
  • Marginal welfare costs
  • Taxation

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