DP6560 Taxes, Benefits, and Careers: Complete Versus Incomplete Markets

Author(s): Lars Ljungqvist , Thomas J Sargent

Publication Date: November 2007

Keyword(s): benefits , career , complete markets , employment lotteries , human capital , incomplete markets , indivisible labour , labour supply elasticity , retirement , taxes

JEL(s): E24 , E62 , J21 , J26

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP6560.asp.asp

An incomplete markets life-cycle model with indivisible labour makes career lengths and human capital accumulation respond to labour tax rates and government supplied non-employment benefits. We compare aggregate and individual outcomes in this individualistic incomplete markets model with those in a comparable collectivist representative family with employment lotteries and complete insurance markets. The incomplete and complete market structures assign leisure to different types of individuals who are distinguished by their human capital and age. These microeconomic differences distinguish the two models in terms of how macroeconomic aggregates respond to some types of government supplied non-employment benefits, but remarkably, not to labor tax changes.