Minchul Yum, University of Mannheim

On the Distribution of Wealth and Labor Force Participation

The labor force participation rate has been shown to be nearly ‡flat across wealth quintiles in recent studies. Using data from the Survey of Consumer Finances, I …find that correlations between wealth and labor force participation are close to zero, in both the aggregate and various sub-groups. Standard incomplete markets models, however, counterfactually predict a highly negative correlation between wealth and labor force participation. In this paper, I develop a fairly standard incomplete markets model and show that government transfers and capital income taxation can make the model substantially more consistent with the data. In addition, as the model’'s fi…t with the distribution of wealth and participation improves, I …find that the aggregate labor supply elasticitiy becomes substantially larger. Since the higher aggregate elasticities are largely driven by more elastic labor supply behaviors of low-wage households, higher labor income taxes considerably raise output per hours worked. This compositional change in the labor force mitigates welfare losses of distorting labor income taxation.



Minchul Yum, University of Mannheim