joint with Yongsung Chang and Junseok Lee
We propose a mechanism that generates an asymmetric Frisch elasticity of the aggregate labor supply. Based on Australian panel data, we document three stylized facts on the labor supply: (i) there are significant gaps between actual and preferred hours of work among workers, (ii) the distribution of the hours gap is asymmetric: workers are over-employed on average, and (iii) preferred hours decline steadily with age. We build a quantitative model that features a fixed cost of changing hours and increasing disutility of work over the life cycle. Our model successfully matches the above facts and, as a result, exhibits an asymmetric labor supply–compatible with a moderately elastic labor supply over the business cycle and at the same time an inelastic one found in studies based on tax holidays.
joint with Jinhee Woo and Jay H. Hong
Kyungjehak Yongu, Vol. 72, No. 4, December 2024, pp. 5--62.
This study quantitatively analyzes the intergenerational welfare impacts of policy alternatives with different cost-sharing structures to respond to the deteriorating health insurance financing caused by demographic changes due to low fertility and aging, using a heterogeneous agent overlapping generation general equilibrium model. The analysis shows that due to the rapidly rising nature of health care costs in the later stage of life, policies that increase out-of-pocket spending will cause significant harm to the welfare of the current older generation. In contrast, the policy scenario with additional taxation based on labor income results in a significant increase in welfare for the current generation and a significant decrease in welfare for future generations. This is because by the 2060s, when the additional fiscal burden increases dramatically due to the significant increase in the old-age dependency ratio, the current generation will have largely retired from the labor market, shifting most of the additional tax burden to future generations. For the policy scenario that uses consumption tax to address the additional tax burden, the change in intergenerational welfare is more uniform than for the other scenarios. This is because the life cycle of consumption, which is the tax base of consumption tax, remains flat over its entire life compared to the life cycle of labor supply.
Negative Income Tax and Universal Basic Income in the Eyes of Aiyagari
joint with Yongsung Chang and Jongsuk Han
Macroeconomic Dynamics, Vol. 28, 2024, pp. 813--825.
We compare two welfare programs: the universal basic income (UBI) and negative income tax (NIT). Under a linear income tax system, we show that (i) the NIT can replicate the allocation of the UBI exactly by providing an identical marginal effective tax schedule, and (ii) the budget of the NIT is always smaller than that of the UBI. According to our quantitative model, which is calibrated to approximate the income and wealth distributions in the United States, the optimal UBI is to pay everyone 7.2% of the average income. We also show that the NIT can achieve a similar average welfare with a much smaller budget (2.3% of the GDP) by providing a subsidy that is generous to the very poor and quickly phases out as income increases.
Equilibrium Tax Rates Under Ex-Ante Heterogeneity and Income-Dependent Voting
joint with Bo Hyun Chang and Yongsung Chang
The B.E. Journal of Macroeconomics, Vol. 22, No. 2, June 2022, pp. 547--573.
The standard models with incomplete markets (e.g., Aiyagari) have difficulty justifying the current income tax rates as an optimal or political equilibrium outcome. Given the highly skewed income distribution, the majority of the population would be in favor of raising taxes to a much higher level. We show that incorporating (i) the ex-ante heterogeneity of earnings and (ii) income-dependent voting behavior helps us to reconcile the large gap between the model and data.
Macroeconomic Effects of Utilizing Foreign Labor Force in Population Aging (in Korean)
joint with Jongsuk Han and Jay H. Hong
Journal of Korean Economic Analysis, Vol. 28, No. 3, December 2022, pp. 111-169.
This paper quantitatively analyzes the economic impact of utilizing foreign workers considering population aging. We build a heterogeneous agent overlapping generation general equilibrium model explicitly distinguishing skilled and unskilled workers, and calibrate parameters in the benchmark economy to replicate the Korean economy in 2017. We introduce population projection from National Statistics Office from 2017 and 2067, and measured the economic impact of demographic transition in Korea. Then, we set up four scenarios related to utilizing foreign workers: (1) temporary residence, unskilled, (2) temporary residence, skilled, (3) permanent immigration, unskilled, (4) permanent immigration, skilled. Our results follows. First, temporary resident workers improve the old-dependency ration, so the transition path of output per capita lays above the benchmark transition path. On the other hand, the permanent immigration does not change the old-dependency ration much, so the output per capita path is not improved much relative to the benchmark path. Regardless of the immigration status, having skilled workers improves the path compared to having unskilled workers.
How Sticky Wages in Existing Jobs Can Affect Hiring
joint with Mark Bils and Yongsung Chang
American Economic Journal-Macroeconomics, Vol. 14, No. 1, January 2022, pp. 1-37.
We consider a matching model of employment with flexible wages for new hires, but sticky wages within matches. Unlike most models of sticky wages, we allow effort to respond if wages are too high or too low. In the Mortensen-Pissarides model, employment is not affected by wage stickiness in existing matches. But it is in our model. If wages of matched workers are stuck too high, firms require more effort, lowering the value of additional labor and reducing hiring. We find that effort’s response can greatly increase wage inertia.
Attenuating Economic Shocks of Demographic Transition with Female Labor (in Korean)
joint with Jongsuk Han and Jay Hong
Kyungjehak Yongu, Vol. 69, No. 3, September 2021, pp. 133-177.
This paper quantitatively analyzes how much an economic shock due to demographic transition can be attenuated by improving female labor quantitatively and qualitatively. We build a heterogeneous-agent overlapping generation model explicitly distinguishing male and female, and calibrate the model to match macroeconomic features in 2017. We implement the population projection from Statistics Korea from 2017 and 2067, and measure the economic impact of demographic transition in Korea. We find that per capita output falls to 81% in the new steady state and the lowest value along the transition path turns out to be 65% of the initial steady state value. When the female productivity is enhanced to the male level, per capita output level in the new steady state and the lowest value along the transition are improved to 95% and 77% of the initial steady state value. If only disutility of female labor is dampened to male level, per capita output in the new steady state and along the transition is improved to 85% and 65%. Our results indicate that boosting female labor quantitatively and qualitatively considerably attenuates negative shocks of demographic transition.
Economic Impact of Universal Basic Income (in Korean)
joint with Yongsung Chang and Jongsuk Han
Journal of Korean Economic Analysis, Vol. 27, No. 1, April 2021, pp. 167-217.
This paper quantitatively analyzes the economic impact of universal basic income (UBI) in the Korean economy. For quantitative analysis, we build an overlapping generation general equilibrium model and calibrate parameters in the benchmark economy to replicate the Korean economy in 2019. We introduce the UBI to the benchmark economy, where each individual receives 3,600 thousand won annually. We raise the income tax rate to finance the total amount of universal basic income. By comparing the steady-state variables, we find that aggregate output, capital, and labor decreased by 22%, 16%, and 19% relative to the benchmark since the UBI reduces the precautionary motives of saving and labor supply. Moreover, income inequality and welfare also get worsen in the UBI economy.
joint with Yongsung Chang and Jongsuk Han
Journal of Economic Theory and Econometrics, Vol. 32, No. 1, March 2021, pp. 80-115.
As the Earned Income Tax Credit(EITC) massively expanded in 2019, 20% of total households benefit from the credit. Due to this large reform, we expect that any future reform will also largely affect the aggregate economy; thus, the heterogeneous agent life cycle dynamic stochastic general equilibrium (HA-LC-DSGE) model will be widely used in future research. This paper reviews the EITC reforms in Korea since the first implementation and surveys the previous studies, examining the labor supply effects. We address why the HALC-DSGE model is necessary to examine the current EITC system in Korea. Then, we provide an example of the HA-LC-DSGE model with a policy simulation of the EITC expansion and explain the model’s salient ingredients to understand the results.
Cross-Sectional and Aggregate Labor Supply
joint with Yongsung Chang, Kyooho Kwon and Richard Rogerson
European Economic Review, Vol. 126, July 2020, 103457.
Standard heterogeneous agent macro models that highlight idiosyncratic productivity shocks do not generate the near zero cross-sectional correlation between hours and wages found in the data. We ask whether matching this moment matters for business cycle properties of these models. To do this we explore two extensions of the model in Chang et al. (2019) that can match this empirical cross-section correlation. One of these departs from the assumption of balanced growth preferences. The other introduces an idiosyncratic shock to the opportunity cost of market work that is highly correlated with the shock to market productivity. While both extensions can match the empirical correlation, they have large and opposing effects on the cyclical volatility of the labor market. We conclude that the cross-sectional moment is important for business cycle analysis and that more work is needed to distinguish the potential mechanisms that can generate it.
joint with Yongsung Chang, Kyooho Kwon and Richard Rogerson
International Economic Review, Vol. 60, No. 1, February 2019, pp. 3-24.
We study business cycle fluctuations in heterogeneous-agent general equilibrium models featuring intensive and extensive margins of labor supply. A nonlinear mapping from time devoted to work to labor services generates operative extensive and intensive margins. Our model captures the salient features of the empirical distribution of hours worked, including how individuals transit within this distribution. We study how various specifications influence labor supply responses to aggregate technology shocks and find that abstracting from intensive margin adjustment can have large effects on the volatility of aggregate hours even if fluctuations along the intensive margin are small.
Macroeconomic Effects of Earned Income Tax Credit Reform (in Korean)
joint with Jongsuk Han and Yongsung Chang
Journal of Korean Economic Analysis, Vol. 25, No. 2, August 2019, pp.1-40.
This paper quantitatively analyze the macroeconomic effects of Earned Income Tax Credit (EITC) reform in 2019. The main features of this reform are removing the age restrict and relaxing the income and asset requirements. We build a life-cycle heterogenous agents model with both extensive and intensive margins to examine the reform effect on aggregate variables. We calibrate the model to match the economy before the reform, and apply new EITC system to quantify the aggregate variables changes from the benchmark. Employment rates increases but the working hours decrease under the new system. These changes are large for single households and female workers. Aggregate output declines due to the reduction of aggregate capital and efficient unit of labors.
Pareto Weights in Practice: A Quantitative Analysis Across 32 OECD Countries
joint with Bo Hyun Chang and Yongsung Chang
Review of Economic Dynamics, Vol. 28, April 2018, pp. 181-204.
We develop a quantitative, heterogeneous-agents general equilibrium model that reproduces the income inequalities of 32 countries in the Organization for Economic Co-operation and Development. Using this model, we compute the optimal income tax progressivity and redistribution for each country under the equal-weight utilitarian social welfare function. A policy reform to adopt the optimal progressivity is supported by the majority of the population. Finally, we uncover the Pareto weights in the social welfare functions of each country that justify the current redistribution policy.
On the Aggregate Labor Supply: A Progress Report
joint with Yongsung Chang
Global Economic Review, Volume 45, Issue 3, 2016, pp. 275-293.
At the aggregate level, the labor supply elasticity can significantly depart from the micro elasticity. In an economy where households make decisions on the labor market participation, the slope of the aggregate labor supply curve is determined by the distribution of reservation wages rather than by the willingness to substitute leisure intertemporally. We present a model economy where earnings and wealth distributions are comparable to those in the micro data. We find that the aggregate labor supply elasticity of such an economy is around 1, which is greater than the typical micro estimates but smaller than those often assumed in the aggregate models. Our model also sheds some light on the recent debate on the failure of the representative agent model.
The impacts of Dual Labour Markets on Unemployment and Productivity (in Korean)
joint with Yongsung Chang and Taesu Kang
Bank of Korea Economic Analysis, March 2016, Vol. 22, No. 1, pp.1-33.
It is now well-known that Korean labor markets are legally segmented into two tiers: one is for regular jobs and the other for non-regular jobs. Non-regular markets are characterized by lower wages and less restrictions on lay-offs. The expansion of non-regular jobs have two opposite impacts. It may reduce the labor costs and increase the total employment, while it may worsen the average welfare of workers which recently raise a major concern in Korean economy. This paper modifies the Mortensen-Pissarides matching model to evaluate the efficiency of the dual structure of the Korean labor markets. The quantitative analysis shows that non-regular jobs deteriorate efficiency but improve flexibility of the Korean labor markets. Policies that deteriorate the working condition of non-regular jobs, such as an decrease in the transition probability or an increase in lay-off probability, results in increases in job searchers and employments in the regular markets. As a result, the efficiency of the aggregate labor markets improves while the unemployment rate increases. Counterfactual labor market reforms that the dual labor markets are unified into a single market with non-regular jobs only or regular jobs only are also evaluated. Production, wages and unemployment rate are higher in the regular-jobs-only economy compared to non-regular-jobs-only economy.
Optimal Income Tax Rates for the Korean Economy
joint with Bo Hyun Chang and Yongsung Chang
KDI Journal of Economic Policy, August 2015, Vol.37, No. 3, pp. 1-30.
Based on a quantitative, heterogeneous agent general equilibrium model, we compute the optimal tax rates for labor and capital incomes for the Korean economy. According to our model, a more progressive income tax schedule along with a higher capital tax rate can increase average welfare by as much as 0.86% of permanent consumption. Approximately 64% of house-holds, those with low assets and low productivity, are better off when a more progressive optimal tax schedule is adopted. Despite the potentially significant welfare gains, our calculation should be interpreted with caution because our benchmark model does not take into account possible capital outflows or the increased administrative costs associated with high taxes.
joint with Bo Hyun Chang and Yongsung Chang
Journal of Korean Economic Analysis, Vol. 21, No. 1, April 2015, pp.135-170.
We develop a heterogeneous-agent general equilibrium model that reproduces the Gini coefficients of the before- and after-tax incomes of 31 OECD countries. Using this model, we compute the optimal income tax rate under the utilitarian social welfare function. We then ask whether the optimal tax reform is supported by the majority. Finally, we uncover the Pareto weights of each society's social welfare function that justify the current redistribution policy.
Accounting for Global Dispersion of Current Accounts
joint with Yongsung Chang and Jaewoo Lee
Review of Economic Dynamics, Volume 16, Issue 3, 2013, pp. 477-496.
We undertake a quantitative analysis of the global dispersion of current accounts, incorporating important market frictions in trade and financial flows. Calibrated with conventional parameter values, the stochastic stationary equilibrium of the model accounts for nearly all of the global dispersion of current accounts. The model also implies that the easing of financial frictions can account for the historical increase in the current account dispersion.
Labor Market Heterogeneity, Aggregation, and the Policy-(In)variance of DSGE Model Parameters
joint with Yongsung Chang and Frank Schorfeide
Journal of the European Economic Association, 11 (S1), 2013, pp. 193-220. Online Appendix
Data from a heterogeneous-agents economy with incomplete asset markets and indivisible labor supply are simulated under various fiscal policy regimes and an approximating representative-agent model is estimated. Preference and technology parameter estimates of the representative-agent model are not invariant to policy changes and the bias in the representative-agent model's policy predictions is large compared to predictive intervals that reflect parameter uncertainty. Since it is not always feasible to account for heterogeneity explicitly, it is important to recognize the possibility that the parameters of a highly aggregated model may not be invariant with respect to policy changes.
Comparative Advantage and Unemployment
joint with Mark Bils and Yongsung Chang
Journal of Monetary Economics, Volume 59, Issue 2, 2012, pp. 15-165.
Worker heterogeneity in productivity and labor supply is introduced into a matching model. Workers who earn high wages and work high hours are identifed as those with strong market comparative advantage---high rents from being employed. The model is calibrated to match separation, job finding, and employment in the SIPP data. The model predicts a big drop in employment for workers with weak comparative advantage during recessions. But the data show that workers with strong comparative advantage also display sizable employment fluctuations, implying that aggregate employment fluctuations are not explained by the responses of workers with small rents to employment.
joint with Yongsung Chang
The B.E. Journal of Macroeconomics: Volume 11, Issue 1 (Contributions), 2011, Article 42.
Using a standard incomplete-markets model, we compute the welfare of two socioeconomic systems: laissez-faire and egalitarianism. The egalitarian system (in which after-tax wages are compressed) provides insurance against income risks but at the cost of inefficiency: it undermines productive workers’ incentives to work. When the stochastic process of idiosyncratic productivity shocks are calibrated to match the earnings inequality, the egalitarian society yields a much higher welfare as the insurance benefit dominates the efficiency loss. However, when the idiosyncratic productivity shocks are calibrated to capture the ex-post heterogeneity of earnings only, households are better off under laissez-faire if the labor supply is elastic enough. Transition between the two regimes is computed. When the wage compression is removed from the egalitarian steady state, the inequality emerges quickly and reaches its laissez-faire steady state in 20 years.
Interpreting Labor Supply Regressions in a Model of Full and Part-Time Work
joint with Yongsung Chang, Kyooho Kwon and Richard Rogerson
American Economic Review: Papers and Proceedings 2011, 101:3, pp. 476-481
We construct a family model of labor supply that features adjustment along both the intensive and extensive margin. Intensive margin adjsutment is restricted to two values: full time work and part-time work. Using simulated data from the steady state of the calibrated model, we examine whether standard labor supply regressions can uncover the true value of the intertemporal elasticity of labor supply parameter. We find positive estimated elasticities that are larger for women and that are highly significant, but they bear virtually no relationship to the underlying preference parameters.
Worker Heterogeneity and Endogeneous Separations in a Matching Model of Unemployment Fluctuations
joint with Mark Bils and Yongsung Chang
American Economic Journal: Macroeconomics, 3(1), 2011, pp. 128-154.
We model worker heterogeneity in the rents from being employed in a Diamond-Mortensen-Pissarides model of matching and unemployment. We show that heterogeneity, reflecting differences in match quality and worker assets, reduces the extent of fluctuations in separations and unemployment. We find that the model faces a trade-off---it cannot produce both realistic
dispersion in wage growth across workers and realistic cyclical fluctuations in unemployment.
Can a Representative-Agent Model Represent a Heterogeneous-Agent Economy?
joint with Sungbae An and Yongsung Chang
American Economic Journal: Macroeconomics, 1(2), 2009, pp. 29-54.
Accounting for observed fluctuations in aggregate employment, consumption, and real wage using the optimality conditions of a representative household requires preferences that are incompatible with economic priors. In order to reconcile theory with data, we construct a model with heterogeneous agents whose decisions are difficult to aggregate because of incomplete capital markets and the indivisible nature of labor supply. If we were to explain the model-generated aggregate time series using decisions of a stand-in household, such a household must have a non-concave or unstable utility as is often found with the aggregate U.S. data.
Unemployment Insurance Policy with Endogenous Labor Force Participation
Journal of Economic Theory and Econometrics, 19(4), 2008, pp. 1-36.
We construct a variant of the Mortensen--Pissarides matching model in which a worker's labor force participation decision is endogenous. The distinction between unemployment and nonparticipation, two non-working states, is due to a worker's job search behavior. A key feature of the model is that heterogeneity in productivity is introduced in order to characterize a worker's endogenous search intensity choice. A distinguishing result from the quantitative experiment of the unemployment insurance (UI) policy is that an increase in UI benefits has a significant impact on the labor force size as well as on the composition of the labor force, which crucially depends on the authority's ability to monitor the moral hazard. With perfect monitoring, more generous UI benefits increase both the ratios of employment and unemployment to population. In the absence of monitoring, we find the opposite results.
Effects of Fiscal Policy on Labor Markets: A Dynamic General Equilibrium Analysis
joint with Yongsung Chang
Hankuk Gaebal Yeongu (in Korean), December, 2008.
This paper considers a heterogeneous agent dynamic general equilibrium model and analyzes effects of an increase in labor income tax rate on labor market and the aggregate variables in Korea. The fiscal policy regarding how the government uses the additional tax revenue may take the two forms: 1) general transfer and 2) earned income tax credit (EITC). The model features are as follows: 1) Workers are heterogeneous in their productivity. 2)Labor is indivisible, hence the analysis focuses on the variation in labor supply through the extensive margin in response to a change in fiscal policy. 3) The incomplete markets are introduced, so individual workers can not perfectly insure themselves against risks related to stochastic changes in income or employment status. 4) The model is of general equilibrium, hence it is equiped to analyze the feedback effect of changes in aggregate variables on individual workers' decisions. In the case of general transfer policy, the government equally distributes the additional tax revenue to all workers regardless of their employment states. Under this policy, an increase in the labor income tax rate dampens work incentives of individual workers so that the aggregate employment rate decreases by 1% compared with the benchmark economy. In the case of EITC policy, only employed workers whose labor incomes are below a certain EITC ceiling are eligible for the EITC benefits. Unlike the general transfer policy, the EITC induces low-income workers to participate the labor market to be eligible for EITC benefits. Hence, the aggregate employment rate may increase by 2.7% at the maximum. As the EITC ceiling increases, too many workers can collect the EITC but the benefits per worker becomes too little so that the increase in employment rate is negligible. By and large, this study demonstrates that EITC may effectively raise the aggregate employment rate, and that it can be a useful policy tool in response to the decrease in the labor force due to population aging as observed in Korea recently.
Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations
joint with Yongsung Chang
American Economic Review, 97(5), 2007, pp. 1939-1956.
We demonstrate that aggregate employment and consumption can increase without a corresponding movement in productivity in a model with heterogeneous agents where the only aggregate disturbance is a productivity shock. The interaction between incomplete capital markets and indivisible labor results in a low employment-productivity correlation and creates a time-varying wedge between the marginal rate of substitution (for commodity consumption and hours) and productivity. Our results caution against viewing the measured wedge as an inefficiency due to a failure of labor-market clearing or as a fundamental driving force behind business cycles.
joint with Yongsung Chang
International Economic Review, 47(1), 2006, pp. 1-27.
At the aggregate level, the labor-supply elasticity depends on the reservation-wage distribution. We present a model economy where workforce heterogeneity stems from idiosyncratic productivity shocks. The model economy exhibits the cross-sectional earnings and wealth distributions that are comparable to those in the micro data. We find that the aggregate labor-supply elasticity of such an economy is around 1, greater than a typical micro estimate.
joint with Yongsung Chang
Economic Quarterly, 91(1), 2005. pp. 21-37.
The labor supply elasticity of an individual household and the aggregate labor supply elasticity of all households can differ significantly. If individual households not only decide on their hours worked, but also on whether to work or not, then the aggregate labor supply is determined not only by the willingness to substitute leisure over time, but also by the distribution of reservation wages. We present a model economy where earnings and wealth distributions are comparable to those in the micro data. We find that the aggregate labor supply elasticity of such an economy is around 1 which is greater than the typical micro estimates but smaller than those often assumed in the aggregate models.
Employment and the Sexual and Reproductive Behavior of Female Adolescents
joint with Lauren Rich
Perspectives on Sexual and Reproductive Health, Vol 34, No. 3, 2002.
Patterns of Later Life Education among Teenage Mothers
joint with Lauren Rich
Gender and Society, Vol. 13, No. 6, 1999.
The Estimates of Human Capital in Korea, 1963--1993
joint with Jong-Wha Lee
Korea Social Science Journal, 23, 1997.